Internal Analysis

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Internal Analysis
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Lecture Topics

• Purpose of Internal Analysis
• Competitive Advantage and Core Competence
• Value Chain
• Financial Analysis
• Combining Internal and External Analyses

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Purpose of Internal Analysis

• An organizations future success depends on its
  own internal conditions as well as external
  conditions
• Managers need to be able to identify
• Strengths that the company can relay on in order
  to compete
• Weaknesses that need to be corrected or minimized
  as competitive factors

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Managers must understand

• The role of resources, capabilities, and
  distinctive competencies in the process by which
  companies create value and profit
• The importance of superior efficiency,
  innovation, quality, and responsiveness to
  customers
• The sources of their companys competitive
  advantage (strengths and weaknesses)

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Competitive Advantage

• The collection of factors that sets a company
  apart from its competitors and gives it a unique
  position in the industry/market
• Means to add value for stakeholders
• Focus especially on adding value for customers

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Core Competence(ies)

• A unique set of lasting capabilities that a
  company relies on to achieve competitive
  advantage and add value
• Innovation
• Efficiency
• Customer Responsiveness
• Quality
• Special Expertise

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The Value Chain

• A company is a chain of activities for
  transforming inputs into outputs that customers
  value
• The transformation process is composed of primary
  and support activities that add value to the
  product

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Value Chain
Service
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Value Chain Interpretation

• Represents a company or any organization
• Simplified illustration of all activities that an
  organization must perform
• Framework for analyzing a companys strengths and
  weaknesses
• Margin represents profit- expand margin by
• Being able to charge a higher price
• Operating at a lower cost within the Value Chain

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Primary Activities in the Value Chain

• Activities directly involved in producing,
  selling, distributing, and servicing product for
  buyer.
• Inbound logistics receiving, storing, and
  distributing inputs for production
• Operations all activities involved in
  transforming inputs into final products
• Outbound logistics collecting, storing,
  distributing product to final buyer
• Marketing and Sales activities used to get
  customers to buy company products
• Service installation, repair, support, training
  for using a product

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Support Activities in the Value Chain

• Activities that enable the performance of primary
  activities
• Firm infrastructure companywide support of
  entire value chain includes quality of
  management, financial performance, strategy,
  organizational culture
• Human resource management recruiting, hiring,
  training, reward systems for employees
• Research and development design of products and
  processes that enhance company performance not
  limited to equipment
• Procurement purchasing and managing inputs used
  in operations developing and managing supplier
  relations

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Applying Value Chain Analysis

• Framework for identifying companys strengths and
  weaknesses
• Means to focus on where the companys core
  competencies exist and can be used to achieve
  competitive advantage and add value
• Comparison with competitors reveals opportunities
  for improving companys competitive position

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Resource-Based View (RBV)

1. RBV is a method of analyzing and identifying a
   firms strategic advantages based on examining
   its distinct combination of assets, skills,
   capabilities, and intangibles
2. The RBVs underlying premise is that firms differ
   in fundamental ways because each firm possesses a
   unique bundle of resources
3. Each firm develops competencies from these
   resources, and these become the source of the
   firms competitive advantages

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Three Basic Resources

1. Tangible assets are the easiest resources to
   identify and are often found on a firms balance
   sheet
2. Intangible assets are resources such as brand
   names, company reputation, organizational morale,
   technical knowledge, patents and trademarks, and
   accumulated experience
3. Organizational capabilities are not specific
   inputs. They are the skills that a company uses
   to transform inputs into outputs

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What makes a resource valuable?

• 4 Guidelines
• Is the resource or skill critical to fulfilling a
  customers need better than that of the firms
  competitors? Resurgence of Environmentalism
• Is the resource scarce? Is it in short supply or
  not easily substituted for or imitated?
• Appropriability Who actually gets the profit
  created by a resource?
• Durability How rapidly will the resource
  depreciate?

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Elements of Scarcity

• Short Supply
• Availability of Substitutes
• Imitation
• Isolating Mechanisms
• Physically Unique Resources
• Path-Dependent Resources
• Casual Ambiguity
• Economic Deterrence

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Resource Imitation
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Using RBV in Internal Analysis

• It is helpful to
• Disaggregate resources
• Utilize a functional perspective
• Look at organizational processes
• Use the value chain approach

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Applying the Resource Based View
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Making Meaningful Comparisons

• Managers need objective standards to use when
  examining internal resources and value-building
  activities
• Strategists use the firms historical experience
  as a basis for evaluating internal factors
• Benchmarking, or comparing the way our company
  performs a specific activity with a competitor or
  other company doing the same thing, has become a
  central concern of managers in quality commitment
  companies worldwide

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Comparison with Key Success Factors in the
Industry

• The key determinants of success in an industry
  may be used to identify a firms internal
  strengths and weaknesses
• A strategist seeks to determine whether a firms
  current internal capabilities represent strengths
  or weaknesses in new competitive arenas

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Financial Analysis

• Uses companys financial results to assess
  companys performance
• Requires comparisons of results over multiple
  years and against industry standards
• Important tool to identify companys strengths
  and weaknesses and potential problem areas.

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Types of Ratios

• Profitability
• Activity Efficiency
• Liquidity
• Debt - Leverage
• Growth

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Analyzing Competitive Advantage and Profitability

• Benchmarking company performance against that of
  competitors and the companys own historic
  performance
• Return on invested capital

• Net profit Total revenues Total costs

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Ways to Increase ROIC

• Increase the companys return on sales
• Reduce cost of goods sold
• Reduce spending on sales force, marketing,
  general, and administrative expenses
• Reduce RD spending
• Increase sales revenue more than costs
• Increase sales revenues from invested capital
• Reduce the amount of working capital
• Reduce amount of fixed capital

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Why Companies Fail

• Inertia
• Companies find it difficult to change their
  strategies and structures
• Prior strategic commitments
• Limit a companys ability to imitate and cause
  competitive disadvantage
• The Icarus paradox
• A company can become so specialized based on past
  success that it loses sight of market realities
• Craftsmen, builders, pioneers, salesmen

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Combining Internal and External Analyses

• Internal and External Analyses commonly referred
  to as SWOT
• Strengths
• Weaknesses
• Opportunities
• Threats
• Strengths and Weaknesses identified from Internal
  Analysis
• Opportunities and Threats identified from
  External Analyses

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Internal Analysis

• Strengths and Weaknesses identified through the
  use of tools such as
• Vision, Mission, Objectives
• Stakeholder Analysis
• Core Competencies
• Value Chain
• Building Blocks of Competitive Advantage
• Financial Analysis

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External Analysis

• Opportunities and Threats identified through the
  use of tools such as
• General Environment Assessment
• Five Force Analysis
• Key Success Factors in Industry
• Competitive Changes during Industry Evolution
• Strategic Groups
• National Competitive Advantage

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Results of Internal and External Analysis

• Requires creative interpretation
• Understanding of companys competitive position
  in its industry
• Identification of strategic issues the company
  faces
• Strategic issues
• Represent dangers to the companys long-term
  survival
• Suggest areas where the company should
  concentrate its efforts in order to grow

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• Internal Analysis
• Strengths
• Weaknesses

• External Analysis
• Opportunities
• Threats

Tools
Tools
Strategic Issues
Strategic Alternatives
Strategy