Internal Environment

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Internal Environment

• 3rd Lecture
• MSc Agricultural Economics and Management

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External and Internal Analyses
By studying the external environment, firms
identify what they might choose to do
Opportunities and threats
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External and Internal Analyses
By studying the internal environment, firms
identify what they can do
Unique resources, capabilities, and core
competencies (sustainable competitive advantage)
The Firm
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Challenge of Internal Analysis

• How do we effectively manage current core
  competencies while simultaneously developing new
  ones?
• How do we assemble bundles of resources,
  capabilities and core competencies to create
  value for customers?
• How do we learn to change rapidly?

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Conditions Affecting Managerial Decisions About
Resources, Capabilities, and Core Competencies

• Uncertainty regarding characteristics of the
  general and the industry environments,
  competitors actions, and customers preferences
• Complexity regarding the interrelated causes
  shaping a firms environments and perceptions of
  the environments
• Intraorganizational Conflicts among people making
  managerial decisions and those affected by them

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Choosing the right tools for internal analysis

• Start with simple techniques
• Consider all tools and identify those likely to
  be useful
• Define the competitive capabilities the
  enterprise needs
• Identify the subsystems which support these
  capabilities
• Identify core competence relative to competitive
  capabilities
• Determine changes to enhance/improve core
  competence
• Take a systemic view
• Adjust the methods of analysis in the light of
  what is found

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Some commonly used techniques for internal
analysis
Single Businesses Resource Audit Analysis of
cost and profit Benchmarking Value Chain
Analysis Supply Chain Analysis
Multiple Businesses Portfolio Analysis
Both Single and Multiple Businesses Core
Competencies Shareholder Value Analysis
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Resource Audit

• Resources
• Physical
• Human
• Financial
• Other
• Quality and Quantity
• Unique resources
• A good initial analysis

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Internal Audit
Parallels process of external audit

• Information from
• Management
• Marketing
• Finance/accounting
• Production/operations
• Research Development
• Management information Systems

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Marketing
Marketing Functions

• Customer analysis
• Selling products/services
• Product service planning
• Pricing
• Distribution
• Marketing research
• Opportunity analysis

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Finance/Accounting
Finance/Accounting Functions

• Investment decision (Capital budgeting)
• Financing decision
• Dividend decision

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Production/Operations
Production/Operations Functions

• Process
• Capacity
• Inventory
• Workforce
• Quality

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Research Development
Research Development Functions

• Development of new products before competitors
• Improving product quality
• Improving manufacturing processes to reduce costs

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Management Information Systems

• Information Systems
• Security
• User-friendly
• E-commerce

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Analysis of Costs and Profit

• Current sources of profits and trends
• Recast standard reporting to give new insights
• Pragmatic approach to get value from time and
  effort spent
• A good initial analysis

Single Businesses Resource Audit Analysis of
cost and profit Benchmarking Value Chain
Analysis Supply Chain Analysis
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Benchmarking

• Objective comparison with best in class
• Simple in theory - Hard in practice
• Observed differences in performance may be due
  to differences in parameters
• Qualitative observations may be more valuable
  than quantitative

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Benchmarking - at three levels
Level of
Through
Examples of measures
benchmarking
Resources
Resource audit
Quantity of resources,
e.g.
revenue/employee

capital intensity

Quality of resources,
e.g.
qualifications of

employees
age of machinery

uniqueness (e.g.

patents)
Competences in
Analysing activities
Sales calls/sales person
separate activities
Output/ employee
Materials wastage
Competences
Analysing overall
Market share
through
performance
Profitability
Productivity
managing linkages
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Value Chain Analysis

• Basic Value chain
• Elegant in theory
• Time-consuming in practice
• Revised value chain to reflect power of people
  and knowledge

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Value Creation
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The Basic Value Chain
Margin
Margin
Service
Marketing Sales
Technological Development
Human Resource Mgmt.
Support Activities
Outbound Logistics
Firm Infrastructure
Procurement
Operations
Inbound Logistics
Primary Activities
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To capitalize on the usefulness of the Value
Chain concept...
it is important to recognize that...
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Value Chains are part of a Total Value System
Firm Value Chain
Supplier Value Chain
Channel Value Chain
Buyer Value Chain
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Value Chains are part of a Total Value System
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Supplier Value Chain
Upstream Value
Perform valuable activities that complement the
firms activities
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Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Buyer Value Chain
Upstream Value
Channel Value Chain
Perform valuable activities that complement the
firms activities
Each firm must eventually find a way to become a
part of some buyers value chain
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Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Upstream Value
Each firm must eventually find a way to become a
part of some buyers value chain
Perform valuable activities that complement the
firms activities
Ultimate basis for differentiation is the ability
to play a role in a buyers value chain
This creates VALUE!!
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Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Each firm must eventually find a way to become a
part of some buyers value chain
Upstream Value
Perform valuable activities that complement the
firms activities
Ultimate basis for differentiation is the ability
to play a role in a buyers value chain
This creates VALUE!!
Value chains vary for firms in an industry,
reflecting each firms unique qualities

• History
• Strategy
• Success at Implementation

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Outsourcing
Outsourcing is the purchase of some or all of a
value-creating activity from an external
supplier Usually this is because the specialty
supplier can provide these functions more
efficiently
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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

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Strategic Rationales for Outsourcing

• 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

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Strategic Rationales for Outsourcing

• 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
• dont 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

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Outsourcing Issues

• Nonstrategic Team of Resources
• do not outsource capabilities that are critical
  to their success, even though the capabilities
  are not actual sources of competitive advantage
• Firms Knowledge Base
• do not outsource activities that stimulate the
  development of new capabilities and competencies

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Revised Value Chain
SUPPORT ACTIVITIES
revenue, profit, market share,
PRIMARY ACTIVITIES
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Product portfolio matrices
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Product portfolio matrices
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Portfolio Analyses

• Over-coming some pitfalls
• Defining high and low (growth or share) can
  be difficult
• Plot SBUs not products
• Apply to market segments not whole markets
• Assess the role of each SBU
• Consider wider resource implications - not just
  cash
• Dogs may have a positive role

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Tests for Core Competence

• Essential to corporate survival in short and long
  term
• Invisible to competitors
• Difficult to imitate
• Unique to the enterprise
• Result from a mix of skills, resources and
  processes
• A capability which the organization can sustain
  over time
• Greater than the competence of an individual
• Essential to the development of core products
• Essential to the implementation of strategic
  intent
• Essential to the strategic choices of the
  enterprise
• Marketable and commercially viable
• Few in number

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The roots of core competence for a typical
manufacturing business
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The roots of core competence for typical
professional services firms
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Components ofInternal Analysis
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Resources, Capabilities and Core Competencies

• Capabilities
• Are the firms capacity to deploy resources that
  have been purposely integrated to achieve a
  desired end state
• Emerge over time through complex interactions
  among tangible and intangible resources
• Often are based on developing, carrying and
  exchanging information and knowledge through the
  firms human capital

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Resources, Capabilities and Core Competencies

• Capabilities
• The foundation of many capabilities lies in
• The unique skills and knowledge of a firms
  employees
• The functional expertise of those employees
• Capabilities are often developed in specific
  functional areas or as part of a functional area

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Examples of Firms Capabilities
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Resources, Capabilities and Core Competencies

• Core Competencies
• Resources and capabilities that serve as a source
  of a firms competitive advantage
• Distinguish a company competitively and reflect
  its personality
• Emerge over time through an organizational
  process of accumulating and learning how to
  deploy different resources and capabilities

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Resources, Capabilities and Core Competencies

• Core Competencies
• Activities that a firm performs especially well
  compared to competitors
• Activities through which the firm adds unique
  value to its goods or services over a long period
  of time

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Building Sustainable Competitive Advantage

• Four Criteria of Sustainable Competitive
  Advantage
• Valuable
• Rare
• Costly to imitate
• Nonsubstituable

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The Four Criteria of Sustainable Competitive
Advantage
Valuable Capabilities Help a firm neutralize
threats or exploit opportunities Rare
Capabilities Are not possessed by many
others Costly-to-Imitate Capabilities
Historical A unique and a valuable
organizational culture or brand name
Ambiguous cause The causes and uses of a
competence are unclear Social complexity
Interpersonal relationships, trust, and
friendship among managers, suppliers,
and customers Nonsubstitutable
Capabilities No strategic equivalent
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Building Sustainable Competitive Advantage

• Valuable capabilities
• Help a firm neutralize threats or exploit
  opportunities
• Rare capabilities
• Are not possessed by many others

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Building Sustainable Competitive Advantage

• Costly-to-Imitate Capabilities
• Historical
• A unique and a valuable organizational culture or
  brand name
• Ambiguous cause
• The causes and uses of a competence are unclear
• Social complexity
• Interpersonal relationships, trust, and
  friendship among managers, suppliers, and
  customers

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Building Sustainable Competitive Advantage

• Nonsubstitutable Capabilities
• No strategic equivalent

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Core Competence as a Strategic Capability
Yes
Does it satisfy the criteria of sustainable
competitive advantage?
The source of
No
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Sustainability of Competitive Advantage

• Sustainability of competitive advantage is a
  function of
• the rate of core-competence obsolescence due to
  environmental changes
• the availability of substitutes for the core
  competence
• the imitability of the core competence

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Performance Implications
Costly to Imitate?
Nonsubstitutable
Valuable?
Competitive Consequences
Performance Implications
Rare?
Competitive Disadvantage
Below Average Returns
No
No
No
No
Yes/ No
Competitive Parity
Average Returns
Yes
No
No
Above Average to Average Returns
Yes/ No
Temporary Com- petitive Advantage
Yes
Yes
No
Above Average Returns
Sustainable Com- petitive Advantage
Yes
Yes
Yes
Yes
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Core Competencies Cautions and Reminders

• Never take for granted that core competencies
  will continue to provide a source of competitive
  advantage
• All core competencies have the potential to
  become core rigidities
• Core rigidities are former core competencies that
  now generate inertia and stifle innovation

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Applying Shareholder Value Analysis
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The SWOT diagram may summarise the results of
analyses
Internal Analyses
Weaknesses
Strengths
Opportunities
Threats
External Analyses
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Strategic Assessment of a business as a whole

• Questions
• What business are we really in?
• What real customer needs do we satisfy?
• What problem do we solve for our customers?

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Summary of Managerial Practices to Adopt

• Understand a firm's internal strengths and
  weaknesses before attempting to formulate
  strategies.
• Make sure the strategy you develop reflects this
  understanding by using insights gained from your
  assessment of the firm's internal strengths and
  weaknesses to shape your strategies.
• Recognize that internal resources take three
  related forms (1) assets that, when combined
  with (2) capabilities, result in (3) competencies.

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Summary of Managerial Practices to Adopt

• Use the tests that have been developed as part of
  the resource-based view of competition to assess
  the ability of internal resources to yield
  competitive advantages.
• Identify the critical success factors for your
  firm and make sure to emphasize them in assessing
  the firm's strengths and weaknesses and also in
  formulating strategy.
• Use the value chain framework to help identify
  the contributions various activities make to the
  firm's profit margins, and let this information
  guide your internal assessment.

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Summary of Managerial Practices to Adopt

• Identify the firm's core business processes and
  carefully assess how well they provide value for
  both external and internal customers by
  integrating the contributions of various pieces
  of the value chain.
• Use a balanced-scorecard approach to evaluating
  the firm's strengths and weaknesses. You may
  begin with the financial perspective, but do not
  stop there. Use the customer, operations, and
  organizational perspectives to understand the
  factors that underpin financial performance. Your
  best chance for influencing financial performance
  is through factors that only become apparent by
  adopting these other perspectives.

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Summary of Managerial Practices to Adopt

• Use ratio analysis to assess the financial health
  of the business in terms of its liquidity,
  leverage, operating efficiency, and
  profitability.
• Don't limit your use of quantitative analysis to
  financial matters. A well-rounded analysis
  inevitably draws from nonfinancial matters, and
  these may lend themselves to quantitative
  analysis, too.
• Incorporate qualitative analysis to cover the
  important aspects of business that are not easily
  quantified.

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Summary of Managerial Practices to Adopt

• In making comparisons, mix and match different
  standards (industry' norms, historical data, and
  benchmarks) to suit your purposes and to overcome
  the limitations inherent in each.