Chapter 2 internal environmental analysis

Internal Environmental Analysis

HCAD 5390

Assessing Organizational Ability to Make Strategy

Analyze historical and current financial performance

Review strategic assets – resources and competencies

Breakdown and evaluate the internal value chain

Historical Financial Performance

Sales, market share, and profits Free cash flow External capital sources Capital project hurdle rate Other capital demands Shareholder value

Increasing Shareholder Value

Achieve existing profits with less capital Increase profits with no additional capital Decrease the cost of equity capital Invest more capital in strategic projects that earn

above average rates of return

Current Financial Performance

Balance sheet Operating or income statement Cash flow statement Statement of changes in owners’ equity (for-

profit) or net assets (not-for-profit)

Ratio Analysis of Financial Statements - Liquidity

Current ratio Average collection period Days cash-on-hand, short-term sources Average payment period

Ratio Analysis of Financial Statements - Profitability

Operating margin Total margin Return on net assets

Ratio Analysis of Financial Statements – Operating Efficiency

Total asset turnover Fixed asset turnover Inventory turnover

Ratio Analysis of Financial Statements – Capital Structure

Net assets (or equity) to total assets Long-term debt to net assets (or equity) Debt service coverage

Non-Financial Operating Indicators for a Hospital Organization

Average length of stay Occupancy rate Outpatient revenue as % of total revenue FTE employees per occupied bed

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External and Internal Analyses

General

General

Env

iron

men

t

Env

iron

men

t

GeneralGeneral

EnvironmentEnvironment

Gen

eral

Gen

eral

Environm

ent

Environm

ent

SocioculturalSociocultural

Global

Global

TechnologicalTechnological

Polit

ical

/Leg

al

Polit

ical

/Leg

al

Dem

ogra

phic

Dem

ogra

phic Econom

ic

Economic

IndustryIndustryEnvironmentEnvironment

CompetitorCompetitorEnvironmentEnvironment

By studying the external By studying the external environment, firms identify environment, firms identify what they what they might choose to domight choose to do

Opportunities and threatsOpportunities and threats

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By studying the internal By studying the internal environment, firms identify environment, firms identify what they what they can docan do

Unique resources, Unique resources, capabilities, and core capabilities, and core competenciescompetencies

(sustainable competitive (sustainable competitive advantage)advantage)

External and Internal Analyses

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Value Creation

V

PC C

P-C

V-P

V=Value to ConsumerP=PriceC=Costs of Production

V-P=Consumer SurplusP-C=Profit Margin

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Components ofInternal Analysis

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources• TangibleTangible• IntangibleIntangible

CapabilitiesCapabilities

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

Value CreationValue Creation

Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages

• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable

ValueValueChainChain

AnalysisAnalysis

• OutsourceOutsource

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Challenge of Internal Analysis

How do we effectively manage current core How do we effectively manage current core competencies while simultaneously developing competencies while simultaneously developing new ones?new ones?

How do we assemble bundles of resources, How do we assemble bundles of resources, capabilities and core competencies to create value capabilities and core competencies to create value for customers?for customers?

How do we learn to change rapidly?How do we learn to change rapidly?

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Resources are what an Resources are what an organization has to work organization has to work with--its assets--including with--its assets--including its people and the value of its people and the value of its brand nameits brand name

Resources represent inputs into an Resources represent inputs into an organization’s production organization’s production process... such as capital process... such as capital equipment, skills of employees, equipment, skills of employees, brand names, finances and brand names, finances and talented managerstalented managers

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Tangible ResourcesTangible Resources• FinancialFinancial• OrganizationalOrganizational• PhysicalPhysical• TechnologicalTechnological

Intangible ResourcesIntangible Resources• HumanHuman• InnovationInnovation• ReputationReputation

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Capabilities become important when they are Capabilities become important when they are combined in unique combinations which create core combined in unique combinations which create core competencies which have strategic value and can competencies which have strategic value and can lead to competitive advantagelead to competitive advantage

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Capabilities are what an organization does, and Capabilities are what an organization does, and represent the organization’s capacity to deploy represent the organization’s capacity to deploy resources that have been purposely integrated to resources that have been purposely integrated to achieve a desired end stateachieve a desired end state

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CoreCoreCompetenciesCompetencies

Core competencies are resources and capabilities that serve as Core competencies are resources and capabilities that serve as a source of competitive advantage over rivalsa source of competitive advantage over rivals

Core competencies distinguish a company competitively and Core competencies distinguish a company competitively and make it distinctivemake it distinctive

McKinsey and Co. recommends using three to four McKinsey and Co. recommends using three to four competencies when framing strategic actionscompetencies when framing strategic actions

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Valuable:Valuable: Capabilities that help an organization Capabilities that help an organization neutralize threats or exploit opportunitiesneutralize threats or exploit opportunities

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RareRare: Capabilities that are not possessed by many : Capabilities that are not possessed by many othersothers

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Costly to imitate:Costly to imitate: capabilities that other organizations capabilities that other organizations cannot develop easily, usually due tocannot develop easily, usually due to

• Unique historical conditions• Causal ambiguity• Social complexity

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Nonsubstitutable: capabilities that do not have strategic Nonsubstitutable: capabilities that do not have strategic equivalentsequivalents

• Invisible to competitors• Firm specific knowledge• Trust-based working relationships between

managers and nonmanagerial personnel

Categories of Strategic Resources

Tangible (visible, touchable, measurable) Financial Organizational Physical Technological

Intangible (unseen, amorphous) Human Creative Perceptual

Competencies Leading to Sustainable Competitive Advantage

Valuable to the organization Unique among competitors Difficult or impossible to imitate No substitute competencies

Strategic Uses of Resources and Competencies

Discovery (did not know we had them) Creation (make or acquire new ones) Combination (use them together) Preservation (maintain them) Concentration (use them for the right purpose)

Porter’s Generic Internal Value ChainPorter’s Generic Internal Value Chain

Inbound

Inbound

Logistics

Logistics

Operations

Operations

Outbound

Outbound

Logistics

Logistics

Marketing

Marketing

& S

ales

& S

ales

Service

Service

ProcurementProcurement

Human Resource ManagementHuman Resource Management

Technology DevelopmentTechnology Development

ProcurementProcurement

SSUUPPPPOORRTT

SSUUPPPPOORRTT

AACCTTIIVVIITTIIEESS

AACCTTIIVVIITTIIEESS

Primary ActivitiesPrimary ActivitiesPrimary ActivitiesPrimary Activities

ProfitProfit

Margin

Margin

Internal Value Chain for a Hospital

Referral and Follow-Up

Discharge Planning, Rehab/

LTC Referral

Tests, Diagnosis, Treatment, and

Referral

ER, Admitting, and Patient Intake

Marketing and Promotion

Facilities, Security, Maintenance, Housekeeping

Clinical, Financial, and Managemant Information Systems (EMR, CPOE)

Human Resource Management, Medical Staff Relations, Nurse Recruiting

Legal, Compliance, Patient Advocacy, Patient Satisfaction

Medical Research, Medical Student Training

Governance, Stakeholder and Public Relations

Financial Management, Payer Contracting, Billing

Risk Management, Case Management, Quality Assurance

SUPPLIERS(Physicians,

MCOs)

CUSTOMERS(Patients, payers,

employers)

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After-ServiceAfter-Service

Point-of-ServicePoint-of-Service

Pre-ServicePre-ServiceFirm

Inf

rast

ruct

ure

Firm

Inf

rast

ruct

ure

Hum

an R

esou

rce

Mgm

t.H

uman

Res

ourc

e M

gmt.

Tec

hnol

ogic

al D

evel

opm

ent

Tec

hnol

ogic

al D

evel

opm

ent

Pro

cure

men

tP

rocu

rem

ent

Margin Margin

Service ActivitiesService Activities

Sup

port

Act

ivit

ies

Sup

port

Act

ivit

ies

HospitalHospitalValue ChainValue Chain

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How Resources and Competencies Become Competitive advantage

Resources and Competencies↓

are the basis of↓

Individual Activities↓

that can be managed to↓

Reduce Costs or Provide Additional Value↓

in order to gain↓

Competitive Advantage

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Documents

Chapter 2 internal environmental analysis