CHAPTER 5

Internal
Scanning:
Organizational
Analysis

STRATEGIC MANAGEMENT & BUSINESS POLICY

10TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

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 Chapter objectives
• After completing this chapter, students will
be able to:
– Examine internal environmental variables,
– Identify strengths and weaknesses of an
organization
– Identify and prioritize the critical success or
issues of an organizations,
– Appreciate the criticality of internal capacity
for strategic planning
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 Resource-Based Approach to Organizational Analysis

•Scanning and analyzing the external

environment for opportunities and threats is
necessary for the firm to be able to understand
its competitive environment and its place in
that environment; but not adequate.

Internal strategic factors --

–Critical strengths and weaknesses that are
likely to determine if the firm will be able to take
advantage of opportunities while avoiding
threats

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 Resource-Based Approach to Organizational Analysis

Core and Distinctive Competencies

Resources are an organization’s assets and are thus

the basic building blocks of the organization.
•Resources – physical, human and organizational
•Capabilities – functional business processes or
Capabilities refer to a corporation’s ability to exploit its
resources– consists of business processes and interactions,
•Competency – integration/coordination of cross
functional capabilities.
•Core competency – something that the company
does well across divisional boundaries.
•Distinctive competency – core competency
done better than competitors--- are superior to those of
the competition
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 Core and Distinctive Competencies

VRIO Framework – (Barney) for defining

Distinctive Competencies
–Value – To the Customer/Competitive Adv. Or Does
it provide customer value and competitive advantage?

–Rareness – Do others do it? Do no other competitors

possess it?

–Imitability – Costly to imitate? Is it costly for others to

imitate?

–Organization – Can firm exploit the resource? Is the

firm organized to exploit the resource? If the answer to
each of these questions is yes for a particular
competency, it is considered to be a strength and thus a
distinctive competence.
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 Core and Distinctive Competencies

VRIO Framework – (Barney) for defining

Distinctive Competencies
It is important to evaluate the importance of a
company’s resources, capabilities, and
competencies to ascertain whether they are internal
strategic factors—that is, particular
–strengths and weaknesses that will help determine
the future of the company.
–This can be done by comparing measures of these
factors with measures of
(1) the company’s past performance,
(2) the company’s key competitors, and
(3) the industry as a whole.

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 Resource-Based Approach to Organizational Analysis

5-Step Resource Approach to Strategy

Analysis – (Grant)
1. Identify and classify resources into strengths and
weaknesses
2. Combine the firm’s strengths into specific capabilities
and core competencies.
3. Appraise the profit potential of these capabilities and
competencies in terms of their potential for
sustainable competitive advantage and the ability
to harvest the profits resulting from their use.
• Are there any distinctive competencies?

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 Resource-Based Approach to Organizational Analysis

• 5-Step Resource Approach to Strategy Analysis –

(Grant)
4. Select the strategy that best exploits the
firm’s capabilities and competencies
relative to external opportunities.
5. Identify resource gaps and invest in upgrading
weaknesses.
Where do these competencies come from?
• It may be an asset endowment.
• It may be acquired from someone else.
• It may be shared with another business unit or alliance
partner
• It may be carefully built and accumulated over time
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 Sustainability of Advantage
Sustainability of an Advantage
Durability –
Rate at which a firm’s underlying resources and
capabilities depreciate or become obsolete
Imitability –
Rate at which a firm’s underlying resources and
capabilities can be duplicated by others.
A core competency can be easily imitated to the
extent that it is transparent, transferable, and
replicable.
•Transparency: is the speed with which other firms can understand the
relationship of resources and capabilities supporting a successful firm’s
strategy
•Transferability: is the ability of competitors to gather the resources and
capabilities necessary to support a competitive challenge
•Replicability: is the ability of competitors to use duplicated resources
and capabilities to imitate the other firm’s success

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 Explicit versus Tacit Knowledge
• Explicit knowledge, that is, knowledge that can be
easily articulated and communicated. This is the type of
knowledge that competitive intelligence activities can
quickly identify and communicate.
• Tacit knowledge, in contrast, is knowledge that is not
easily communicated because it is deeply rooted in
employee experience or in a corporation’s culture.
• Tacit knowledge is more valuable and more likely to lead
to a sustainable competitive advantage than is explicit
knowledge because it is much harder for competitors to
imitate.

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 Continuum of Sustainability

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 Business Models

Business Model
•Company’s method for making money in the
current business environment.
•It includes the key structural and operational
characteristics of a firm—how it earns revenue
and makes a profit.
•A business model is usually composed of five
elements:
•Who it serves? Customers
•What it provides? Products
•How it makes money? Revenue streams
•How it differentiates itself? Differentiation
•How it provides products/services? Distribution--
The simplest business model is to provide a good or service
that can be sold such that revenues exceed costs and all
expenses.
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 Business Models

Types of Models --
–Customer Solutions Model – Systems Integrator: selling its expertise
to improve its customers’ operations. IBM uses this model to make
money not by selling IBM products, but by selling its expertise to improve
its customers’ operations
•Profit Pyramid Model – Entry Level to High Profit: The key is to get
customers to buy in at the low-priced, low-margin entry point (Saturn’s basic
sedans) and move them up to high-priced, high-margin products (pickup
trucks) where the company makes its money.
–Multi-Component System/Installed Base Model (eg. Parts)

–with one component providing most of the profits Gillette invented

this classic model to sell razors at break-even pricing in order to
make money on higher-margin razor blades.
–HP does the same with printers and printer cartridges. The product
is thus a system, not just one product,

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 Business Models

Types of Models --
–Advertising Model – Internet Crash: offers its basic product free in
order to make money on advertising. Eg. Radio and TV, Google.
–Originating in the newspaper industry, this model is used heavily
in commercial radio and television.
–Internet-based firms, such as Google and Facebook, offer free
services to users in order to expose them to the advertising that
pays the bills.

•Switchboard Model – Many Buyers & Sellers: In this model a firm acts as

an intermediary to connect multiple sellers to multiple buyers .

•This model has been successfully used by eBay and
Amazon.com.
•Time Model – 1st to Market: Product R&D and speed are the keys to
success in the time model.
•Being the first to market with a new innovation allows a pioneer like
Google to earn extraordinary returns. By the time the rest of the industry
catches up, Google has moved on to a newer, more innovative approach
to keep people coming back 5-15
 Business Models

Types of Models --
–Efficiency Model – Mature Product/Low Price
•In this model a company waits until a product becomes standardized
•and then enters the market with a low-priced, low-margin product that appeals to
the mass market. This model is used by Wal-Mart, KIA Motors,
–Blockbuster (Best seller) Model – Proprietary Product: profitability is
driven by a few key products. In some industries, such as pharmaceuticals
and motion picture studios, profitability is driven by a few key products.
There is more investment in few products
•Profit Multiplier Model – Multi-Product/Spinoff: The idea of this model is to
develop a concept that may or may not make money on its own but, through
synergy, can spin off many profitable products .
•Walt Disney invented this concept by using cartoon
characters to develop high-margin theme parks,
merchandise, and licensing opportunities.

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 Business Models
Types of Models --
–Entrepreneurial Model – Specialized Niche
•In this model, a company offers specialized products/services
to market niches that are too small to be worthwhile to large competitors
but have the potential to grow quickly.
•De Facto Standard Model – Free Product: In this model, a company offers
products free or at a very low price in order to saturate the market and become
the industry standard .
•Once users are locked in, the company offers higher-margin
products using this standard.

•In order to understand how some of these business models work,

it is important to learn where on the value chain the company
makes its money.
•Although a company might offer a large number of products and
services, one product line might contribute most of the profits
(Remember 80/20 Parento Principle) .
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 Value-Chain Analysis

Value Chain – Business Level or

Corporate level section 1
Linked set of value-creating activities
beginning with basic raw material and
ending with distributors getting final
goods into hands of customers.
It is process aspect of the organization.
Process efficiency and effectiveness are
critical; Constraints are also common.

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 Value-Chain Analysis

Typical Value Chain for

a Manufactured Product

“Center of Gravity”
(Distinctive/Core Competency)

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 Corporate Value-Chain Analysis

Corporate Value Chain Analysis – Steps

1. Examine each product line’s value chain in terms of
activities involved.
– Which activities can be considered strengths
(core competencies) or weaknesses (core deficiencies)?
– Do any of the strengths provide competitive
advantage and can they thus be labeled distinctive
competencies?
2. Examine the linkages within each product’s value chain.
– Linkages are the connections between the way one
value activity (for example, marketing) is performed
and the cost of performance of another activity (for
example, quality control).
3. Examine the potential synergies among the value
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chains of different product lines.
 Corporate Value-Chain Analysis

•Each value element, such as advertising or

manufacturing, has an inherent economy of
scale in which activities are conducted at
their lowest possible cost per unit of output.

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 Corporation’s Value Chain

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 Scanning Functional Resources & Capabilities

The simplest way to begin an analysis of a corporation’s value chain is by carefully

examining its traditional functional areas for potential strengths and weaknesses.
Functional resources and capabilities include not only the financial, physical, and
human assets in each area but also the ability of the people in each area to
formulate and implement the necessary functional objectives, strategies, and
policies

Basic Organizational Structures --

–Simple structure – few products/small firm
–Functional structure – functional specialists
–Divisional structure – many product lines
–Strategic business units (SBU’s)
–Conglomerate structure (Holding Co.)

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 Scanning Functional Resources & Capabilities

Strategic business units (SBU’s)

SBU may be of any size or level, but it must have
1. a unique mission.
2. identifiable competitors
3. an external market focus
4. control of it’s business functions

The idea is to decentralize on the basis of strategic elements

rather than on the basis of size, product characteristics, or
span of control and to create horizontal linkages among
units previously kept separate.

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 Scanning Functional Resources & Capabilities

Conglomerate structure
• is appropriate for a large corporation with many
product lines in several unrelated industries.
• A variant of the divisional structure, the
conglomerate structure (sometimes called a holding
company) is typically an assemblage of legally
independent firms (subsidiaries) operating under
one corporate umbrella but. controlled through the
subsidiaries’ boards of directors
• The unrelated nature of the subsidiaries
prevents any attempt at gaining synergy among
them.

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 Basic Organizational Structures

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 Corporate Culture

Corporate Culture
Collection of beliefs, expectations, and values learned and
shared by a corporation’s members and transmitted from
one generation of employees to another.
•Corporate culture has two distinct attributes, intensity and
integration.
Attributes
•Intensity – degree of acceptance
•Integration – shared values; cultural integration is the
extent to which units throughout an organization share
a common culture.

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 Corporate Culture

Functions of Corporate Culture

1. Convey a sense of identity for employees
2. Generate employee commitment to the organization
3. Adds to the stability of the organization social
system
4. Serves as a frame of reference for employees to
make sense of organizational activities and as a
guide for behavior

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 Strategic Marketing Issues

Strategic Marketing Issues

–Market Position & Segmentation
–Marketing Mix
–Product Life Cycle
–Brand & Corporate Reputation
Reputation is
(1) stakeholders’ perceptions of a corporation’s
ability to produce quality goods and
(2) a corporation’s prominence in the minds of
stakeholders,
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 Strategic Marketing Issues

Marketing Mix Variables

Product Place Promotion Price
Quality Channels Advertising List
Features Coverage Personal Selling Discount
Options Locations Sales promotion Allowances
Style Inventory Publicity Payment Period
Brand Name Transportation Credit Terms
Packaging
Sizes
Services
Waranties

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 Product Life Cycle

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 Strategic Marketing Issues

Top 10 Brands for 2004

1 Coca-Cola
2 Microsoft
3 IBM
4 GE
5 Intel
6 Disney
7 McDonalds
8 Nokia
9 Toyota
10 Marlboro

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 Strategic Financial Issues

–Financial leverage
• Ratio of total debt to total assets
• is helpful in describing how debt is used to increase the earnings available
to common
shareholders,
• High leverage may be perceived as a corporate strength in times of
prosperity and ever increasing sales, or as a weakness in times of a
recession and falling sales.
–Capital budgeting
Capital budgeting is the analyzing and ranking of possible investments in fixed
assets such as land, buildings, and equipment in terms of the additional
outlays and additional receipts
that will result from each investment.

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 Strategic Research & Development Issues

–R&D Intensity
Spending as a % of sales

–Technological Competence
Ability to develop and innovate

–Technology Transfer
Ability to move products from research
to the market

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 Strategic Research & Development Issues

R & D Mix
Basic
theoretical research leading to patents and publication
Product
product and packaging development focused on sales
and profit increase
Engineering/Process
concentrating on manufacturing quality and efficiency

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 Technological Discontinuity

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 Strategic Operations Issues

Manufacturing Systems
– Intermittent (Job Shop)
• High variable costs
• Profit/unit is low above break-even
• Can operate at relatively low production rates
– Continuous (Automated/Assembly Lines)
• High fixed cost/Small labor force
• Breakeven is relatively high
• Profitability is at higher levels of production

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 Strategic Operations Issues

Experience Curve
Production costs decline by 20 – 30%
every time production doubles.

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 Strategic Human Resource Management Issues

HRM –

–Increasing use of teams (including virtual

teams)
–Union relations
–Temporary workers (vs. legal constraints in
Ethiopia)
–Quality of work life (vs. digital age), survival
during industrial revolution
–Human diversity( for improved performance
and innovation)

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 Strategic Information Systems Issues

Information Systems Impact of Corporate Performance

1. Automation of back office systems (1970’s - Mainframes)
2. Automate the individual’s tasks (1980’s - PC)
3. Enhance key business functions (1990’s - Business
Process Software) – connecting employees to computers)
4. Create a competitive advantage (2000’s –
Internet/Intranet/Extranets)– connecting clients to
computers of a company.

Evolution of Enterprise information systems is shown in the

next slide.

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 Internal Factor Analysis Summary Table

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