INTERNAL ANALYSIS

Payne
(4)

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Components of Internal Analysis
Value Creation

Competitive
Core Discovering Core Advantage
Competencies Competencies

Capabilities

Four Criteria Value

Resources of Sustainable Chain
• Tangible
• Intangible Advantages Analysis

• Valuable • Outsource
• Rare
• Costly to Imitate
• Nonsubstitutable
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 The
The Links
Links between
between Resources,
Resources, Capabilities
Capabilities
and
and Competitive
Competitive Advantage
Advantage

INDUSTRY KEY
COMPETITIVE SUCCESS FACTORS
STRATEGY
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES

RESOURCES
TANGIBLE INTANGIBLE HUMAN

•Financial •Skills/know-how
•Technology •Capacity for
•Physical •Reputation
communication
•Culture
& collaboration
•Motivation

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Strengths / Weaknesses / Opportunities / Threats

 SWOT
 Strengths Use Value Chain Analysis
and Resource Analysis
 Weaknesses
 Opportunities Build from Industry and
 Threats Competitive Analysis
 Strategy-making must be well-matched to both:
 A firm’s resource strengths and weaknesses
 A firm’s best market opportunities and
external threats to its well-being
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 SWOT Analysis -- Examples
Potential Resource Potential Resource Potential Company Potential External
Strengths Weaknesses Opportunities Threats

• Core competencies in • No clear strategic • Expanding customer • Entry of new

key areas direction groups competitors
• Adequate financial • Obsolete facilities • Expanding • Rising viability of
resources • Excess debt geographic areas substitutes
• Strong brand name • Lack of managerial • Expanding product • Slowing market
image/reputation depth and talent needs from key growth
• An acknowledged customer groups • Adverse shifts in
• Missing key
market leader skills/competencies • Available firms for exchange rates and
• Access to economies purchase or alliance trade policies
• Internal operating due to economic
of scale problems • Costly new
changes regulations and legal
• Cost advantages • Poor implementation • Falling trade barriers requirements
• Better advertising capabilities in attractive foreign
campaigns • Economic recessions
• Weak distribution markets or negative business
• Product innovation network • Changes in legal / cycles
skills • Too narrow product regulatory demands • Growing leverage of
• Proven management line • Complacency among customers or suppliers
• Superior technologies • Weak marketing rival groups • Changing buyer
• Others skills • Development of new needs / trends
technologies • Demographic
changes 5
 Appraising
AppraisingResources
Resources
RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

Internal funds generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
size, location, technology fixed assets.
flexibility. Scale of plants
Land and buildings. Alternative uses for
Raw materials. fixed assets

Technology Patents, copyrights, know how No. of patents owned

R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure
Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity

reputation (with suppliers, customers, Customer retention
government) Supplier loyalty

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyalty of employees pay rates, turnover.
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 The
TheWorld’s
World’sMost
MostValuable
ValuableBrands,
Brands,2003
2003

Rank Company Brand Rank Company Brand

value value
($bn.) ($bn.)

1 Coca-Cola 70.45 11 Toyota 20.78

2 Microsoft 65.17 12 Hewlett-Packard 19.86
3 IBM 51.76 13 Citibank 18.57

4 GE 42.34 14 Ford 17.07

5 Intel 31.11 15 American Express 16.29
6 Nokia 29.44 16 Gillette 15.98
7 Disney 28.03 17 Cisco 15.57
8 McDonald’s 24.69 18 Honda 15.63
9 Marlboro 22.18 19 BMW 15.11
10 Mercedes 21.31 20 Sony 13.15

Source: Interbrand

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 Organization Capabilities
• Capabilities are what a firm does, and represent the firm’s capacity
to deploy resources that have been purposely integrated to achieve
a desired end state.
• Firm competences or skills the firm employs to transfer inputs
to outputs
• Capacity to combine tangible and intangible resources, using
organizational processes to attain desired end.
• The purposeful coordination of resources and competencies.

Examples:
•Outstanding customer service
•Excellent product development capabilities
•Innovativeness of products and services
•Ability to hire, motivate, and retain human capital
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 Appraising
Appraising the
the Capabilities
Capabilities of
of aa
Business
Business School
School

Superfluous Key
Superior Superfluous Keystrengths
strengths Key:
strengths
strengths 6 1 Alumni relations
2 Student placement
9 3 Teaching
Relative Strength

4 Administration
3 5 Course devlpmnt
6 Student recruitment
Parity 5 7 Research
Inconsequential 2 8 Corporate relations
Inconsequential 8 9 Marketing
weaknesses
weaknesses 4 10 IT
11 PR
12 1 12 HRM
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7 Key
Keyweaknesses
weaknesses
Deficient 10

Not Critically
important important
Importance
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 Approaches to Capability Development
 Mergers and Acquisitions
 Fast, but expensive and sometimes risky.
 Microsoft: eShop (1997), Hotmail (1998), NetGames (2000), etc.
 Strategic Alliances
 More targeted and cost effective.
 Includes joint research, technology-sharing, joint marketing, etc
 Incubating Capabilities
 Using separate units can protect the new venture from incompatibilities with
existing structures, management systems, and behavioral norms.
 Yet, the new venture still has access to existing resources.
 Product Sequencing
 Allows for an incremental and indirect approach to capability development by
driving product development. (e.g., 3M or Hyundai)
 Managing the Process
 Commitment to ambitious performance goals can create a driving force for
capability development.
 See strategic intent, resource leverage and stretch (Prahalad & Hamel, 1996).
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 AAFramework
Frameworkfor
forAnalyzing
AnalyzingResources
Resourcesand
andCapabilities
Capabilities

4. Develop strategy implications:

(a) In relation to strengths
- How can these be exploited more effectively?
(b) In relation to weaknesses
- Identify opportunities to outsourcing activities that STRATEGY
can be better performed by other organizations.
- How can weaknesses be corrected through acquiring
and developing resources and capabilities?
POTENTIAL FOR

3. Appraise the firm’s resources and capabilities SUSTAINABLE

in terms of: COMPETITIVE
(a) strategic importance ADVANTAGE
(b) relative strength

2. Explore the linkages between resources and CAPABILITIES

capabilities

1. Identify the firm’s resources and capabilities RESOURCES

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 Competencies vs. Core Competencies vs.
Distinctive Competencies
 A competence is an internal activity that a company
performs better than other internal activities.
 A core competence is a well-performed internal
activity that is central, not peripheral, to a
company’s strategy, competitiveness, and
profitability.
 A distinctive competence is a competitively valuable
activity that a company performs better than its
rivals.
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Assessing Sustainability of Resources and
Capabilities: Four Criteria
Is the resource or capability . . . Implications

• Neutralize threats and exploit

Valuable opportunities
• Not many firms possess
Rare
• Physically unique
Difficult to imitate • Path dependency (how
accumulated over time)
• Causal ambiguity (difficult to
disentangle what it is or how it
could be recreated)
• Social complexity (trust,
interpersonal relationships,
culture, reputation)

• No equivalent strategic resources

Difficult to substitute or capabilities
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 Criteria for Sustainable Competitive
Advantage and Strategic Implications

Is a Resource…

Difficult Without Implications

Valuable Rare to Imitate Substitutes for Competitiveness

No No No No Competitive disadvantage

Yes No No No Competitive parity

Yes Yes No No Temporary competitive advantage

Yes Yes Yes Yes Sustainable competitive advantage

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 Why Rival Companies
Have Different Costs
 Companies do not have the same costs because of
differences in:
 Prices paid for raw materials, component parts,
energy, and other supplier resources
 Basic technology and age of plant & equipment
 Economies of scale and experience curve effects
 Wage rates and productivity levels
 Marketing, promotion, and administration costs
 Inbound and outbound shipping costs
 Forward channel distribution costs

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 What Determines Whether a Company Is
Cost Competitive?
 A company’s cost competitiveness depends on
how well it manages its value chain relative to
competitors
 Three areas contribute to cost differences
1. Suppliers’ activities
2. The company’s own internal activities
3. Forward channel activities
Internally Activities, Costs,
Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Strategic Chains
Suppliers
Margins Partners

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 The Value Chain Concept
 Identifies the separate activities and business
processes performed to design, produce,
market, deliver, and support a product /
service – it can lead to cost efficiencies or
competency development.
 Consists of two types of activities
 Primary activities
 Support activities

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The Basic
Value Chain M
gin ar
ar gin
M

Technological Development
Human Resource Mgmt. Service
Firm Infrastructure
Support Activities

Marketing & Sales

Procurement
Outbound Logistics
Operations
Inbound Logistics

Primary Activities
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 Primary activities of the
VALUE CHAIN
 Inbound Logistics
 Soundness of material and inventory handling
 Efficiency of warehousing activities
 Operations
 Productivity of equipment Production control systems
 Production processes Layout & work-flow design
 Outbound Logistics
 Efficiency of finished goods delivery
 Marketing and Sales
Sales force
 Effective market research
 Innovative sales promotion Image, brand loyalty
 Service
 Customer feedback mechanisms Warranty, guarantee, repair
 Customer education and training
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 Support activities of the
VALUE CHAIN
 Infrastructure
 Physical: Size, location, age, flexibility of facilities and equipment
 Financial: Risk, cost and use of funds, ability to raise capital
 Technology Development
 Research and development
 Interaction with other departments
 Technology transfer
 Encourage innovation
 Procurement
 Obtain raw materials
 acceptable quality
 lowest cost
 Supplier relationships
 Human Resources
 Knowledge: Types, levels of knowledge possessed by
employees throughout the firm
 Skills: Various categories of skills and abilities developed over
time
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 From Value Chain Analysis
to Competitive Advantage
 A company can create competitive advantage by managing its
value chain so as to
 Integrate the knowledge and skills of employees in
competitively valuable ways
 Leverage economies of learning / experience
 Coordinate related activities in ways that build valuable
capabilities
 Build dominating expertise in a value chain activity
critical to customer satisfaction or market success
The strategy-making lesson of value chain analysis:
Sustainable competitive advantage can be created by
(1) managing value chain activities better than rivals, and
(2) developing distinctive capabilities to serve customers!
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 Outsourcing

Outsourcing is the M
r gin ar
gin
purchase of some or M
a

Technological Development
all of a value-
creating activity

Human Resource Mgmt.

from an external
Service
Support Activities

Firm Infrastructure
supplier
Marketing & Sales
Usually this is

Procurement
because the specialty Outbound Logistics
supplier can provide Operations
these functions more Inbound Logistics
efficiently
Primary Activities
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 Strategic Rationales for Outsourcing
 Improve Business Focus
 Lets company focus on broader business issues by having outside experts
handle various operational details
 Provide Access to World-Class Capabilities
 The specialized resources of outsourcing providers makes world-
class capabilities available to firms in a wide range of applications
 Accelerate Business Re-Engineering Benefits
 Achieves re-engineering benefits more quickly by having outsiders--
who have already achieved world-class standards--take over process
 Share Risks
 Reduces investment requirements and makes firm more flexible,
dynamic and better able to adapt to changing opportunities
 Free Resources for Other Purposes
 Permits firm to redirect efforts from non-core activities toward those
that serve customers more effectively
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 Outsourcing Issues
 Greatest Value
 Outsource only to firms possessing a core competence in terms of
performing the primary or support activity being outsourced
 Evaluating Resources and Capabilities
 Do not outsource activities in which the firm itself can create and
capture value
 Environmental Threats and Ongoing Tasks
 Do not outsource primary and support activities that are used to
neutralize environmental threats or complete necessary ongoing
organizational tasks
 Non-strategic Team of Resources
 Do not outsource capabilities that are critical to their success, even
though the capabilities are not actual sources of competitive
advantage
 Firm’s Knowledge Base
 Do not outsource activities that stimulate the development of new
capabilities and competencies
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