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Lecture Objectives
(1) Define internal analysis and discuss why it is important.(2) Describe the relationship between organizational resources,
organizational capabilities, core competencies, and distinctiveorganizational capabilities.
(3) Explain what organizational strengths and weaknesses are.(4) Define the value chain and describe the primary and support
activities on the value chain.(5) Explain the strategic options for correcting cost competitiveness
on the value chain system.(6) Discuss the steps in conducting a competitive strength assessment(7) Explain how to use the internal audit process(8) Discuss the features of an internal environmental analysis process
(9) Describe the steps in capabilities assessment profile
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What is Internal Analysis? The process of identifying and evaluating
an organizations specific characteristics Resources, capabilities, and core competencies Looks at organizations
Current vision
Mission(s) Strategic & financial objectives Strategies
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Why Do an Internal Analysis? Enables a firm to identify its strengths and
weaknesses.
Enables a firm to make good strategic decisions.
Information from internal environment provides basis for developing strategic alternatives.
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A Quick Review of
Organizational Resources Organizational resources are assets an
organization has for carrying out work activitiesand processes Financial resources
Current debt, credit lines, equity, cash reserves, etc.
Physical resources Plant & equipment, inventories, supplies, fixtures, etc.
Human resources
Management & employee skills, training, experiences, etc
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A Quick Review ofOrganizational Resources
Intangible resources Brand names, patents, trademarks, copyrights, etc.
Structural-cultural resources Culture, history, work systems policies, formal
reporting structures, etc
Human, intangible, and structural-culturalresources can be a source of competitiveadvantage Play important role in determining capabilities
or competencies and core competencies
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Organizational Capabilities Organizational capabilities/competencies
The complex and coordinated network of companyroutines and processes that determines howefficiently and effectively the organizationtransforms its resources into products (goods &
services) Involves complex pattern of coordination between
people, & between people and resources Its an internal activity that a company performs
better than other internal activities
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Organizational Capabilities
Organizational routines & processes: Regular, predictable, and sequential patterns of work
activity by organizational members
Sustainable Competitive Advantage (CA): The prolonged maintenance of competitive advantage Capabilities that are capable of leading to CA today may
not continue to do so as conditions & rivals change Dynamic capabilities
An organizations ability to build, integrate andreconfigure capabilities to address rapidly changingenvironments over time.
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Core Competencies Core competencies
A well-performed internal activity that is central , not peripheral, to a companys str ategy, competi ti veness,
and prof i tabi li ty Major value-creating skills and capabilities that
are shared across multiple product lines or multiple businesses
Results from the collaboration among different parts of anorganization
Gives a company a potentially valuable competitivecapability
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From Core Competencies toDistinctive Capabilities
Distinctive Capabilities Special and unique capabilities that distinguish
the organization from its competitors A competi tively valuable activity that a
company performs better than i ts r ivals
Allow a company to develop a sustainablecompetitive advantage and outperform itscompetition
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From Core Competencies toDistinctive Capabilities
Characteristics of distinctive capabilities:(1) Contribute to superior customer value and offers
real benefits to customers(2) Difficult for competitors to imitate(3) Allow the organization to use that capability in a
variety of ways
Whats the relationship betweenorganizational capabilities, core competenciesand distinctive capabilities?
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Examples of Distinctive Capabilities Sharp Corporation
Expertise in flat-panel display technology Toyota
Low-cost, high-quality manufacturing capability andshort design-to-market cycles
Intel Corporation Ability to design and manufacture ever more
powerful microprocessors for PCs Motorola
Defect-free manufacture (six-sigma quality) of cell
phones
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Strengths and Weaknesses
Strengths Resources that an organization possesses and
capabilities that the organization has developed
Both can be e xploited and developed into asustainable competitive advantage
Weaknesses Resources and capabilities that are lacking or
deficient; and that Prevents an organization from developing a
sustainable competitive advantage
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How to Do an Internal AnalysisApproaches to internal analysis
(1) Value Chain Analysis(2) Competitive Strength Assessment(3) An Internal Audit
(4) Internal Environmental Analysis Process(5) Capabilities Assessment Profile
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(1) Value Chain Analysis Value Chain Analysis
Customers want (demand) some type of value fromthe goods and services they purchase or obtain
Customer value arises from(1) Uniqueness of product or service
(2) Low-priced product/service(3) Quick response to specific or distinctive customer needs
Allow assessment of cost competi ti veness oforganization with those of its rivals
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The Value Chain The value chain identifies the separate activiti es and
business processes performed to design, produce,market, deliver, and support a product/service and howwell they create customer value.
Consists of two types of activities
Primary activi ties : create customer value
Inbound logistics, Operations; Outboard logistics; Sales& Marketing; & Customer Service
Support activities: Support primary activities
Procurement; Technological development; HRM;General Administration (Firm infrastructure)
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A Typical Value Chain
OutboundLogisticsOperations
InboundLogistics
Sales andMarketing Service
ProfitMargin
Procurement; Product R&D, Technology
Human Resources Management
General Administration (Firm Infrastructure)
Prim ary A ct iv i t ies and Costs
Suppor tAct iv i t iesand Costs
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The Value Chain System
Activities,
Costs, &Margins ofSuppliers
InternallyPerformedActivities,Costs, &Margins
Activities,Costs, &
Margins ofForwardChannelAllies &
StrategicPartners
Buyer/UserValueChains
UpstreamValue Chain Downstream Value Chains
Firms OwnValue Chain
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Examples of Key Value ChainActivities
Soft Drinks IndustryProcessing of basic ingredientsSyrup manufacture
Bottling & can fillingWholesale distributionRetailing
Computer Software IndustryProgrammingDisk LoadingMarketing
Distribution
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The Value Chain System A companys cost competi ti veness
depends on how well it manages its valuechain relative to competitors
Three areas contribute to cost differences
1. Suppliers activities2. The companys own internal activities
3. Forward channel activities
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The Value Chain System
Assessing a companys cost competi ti veness involves comparing costs along the industrys valuechain
Suppliers value chains are relevant because Costs, quality, and performance of inputs provided by suppliers
influence a firms own costs and product performance
Forward channel allies value chains are relevant because Forward channel allies costs and margins are part of price paid
by ultimate end-user Activities performed affect end-user satisfaction
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Strategic Options for Correcting
Costs Competitiveness Supplier-related costs disadvantages:
Negotiate more favorable prices with suppliers
Work with suppliers to achieve lower costs
Integrate backward
Use lower-priced substitute inputs
Do a better job of managing linkages betweensuppliers value chains and firms own chain
Make up difference by initiating cost savings in other
areas of value chain
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Strategic Options for Correcting
Costs Competitiveness Forward channel allies costs disadvantages:
Push for more favorable terms with distributors andother forward channel allies
Work closely with forward channel allies andcustomers to identify win-win opportunities toreduce costs
Change to a more economical distribution strategy
Make up difference by initiating cost savings earlierin value chain
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Strategic Options for Correcting
Costs Competitiveness Firms own internal cost disadvantages:
Reengineer performance of high-cost activities or business
processes Eliminate some cost-producing activities altogether by
revamping value chain system (VCS) Relocate high-cost activities to lower-cost geographic areas
See if high-cost activities can be performed cheaper byoutside vendors/suppliers Invest in cost-saving technology Simplify product design Achieving savings in backward or forward portions of VCS
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From Value Chain Analysis to
Competitive Advantage A company can create competi tive advantage
by managing its value chain so as to
I ntegrate the knowledge and skills of employees incompetitively valuable ways
Leverage economies of learning or experience curveeffects
Coordinate related activities in ways that buildvaluable capabilities
Bui ld dominating exper tise in a value chain activitycritical to customer satisfaction or market success
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From Value Chain Analysis to
Competitive Advantage The strategy-making lesson of value chain
analysis is that sustainable competi tiveadvantage can be created by:
(1). Managing the value chain activities betterthan competitors; and
(2). Developing distinctive capabilities toserve the needs of customers better
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(2) Assessing Organizations
Competitive Strength How does the firm rank relative to key r ivals on each
industry KSF and relevant measure of competitive
strength (capabilities or core competencies)? Does the firm have a sustainable competi ti ve advantage or
disadvantage What is the ability of the firm to defend its posi tion in
light of Industry driving forces Competitive pressures Anticipated moves of rivals
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Assessing Organizations
Competitive Strength1. List industry key success factors and other relevant
measures of competitive strength
2. Rate firm and key rivals on each factor using ratingscale of 1 - 10 (1 = weak; 10 = strong)3. Decide whether to use a weighted or unweighted rating
system
4. Sum individual ratings to get overall measure ofcompetitive strength for each rival
5. Determine whether the firm enjoys a competitiveadvantage or suffers from competitive disadvantage
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Assessing Organizations
Competitive Strength A weighted competitive strength analysis is
conceptually stronger than an unweighted
competitive strength analysis because All the strength measures are not equally important. E.g., in an industry with strong product differentiation,
the significant strength measures may be Brand awareness Reputation for quality Amount of advertising
Distribution capability, etc.
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Some KSF/Strength Measures
Quality/product performance Reputation/image
Manufacturing capability Technological skills Dealer network/Distribution channels
New product innovation Financial resources Relative cost position Customer service capability
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Assessing Organizations
Competitive Strength What does a high competitive strength rating relative torivals mean? Strong competitive position & possession of competitive
advantages Opportunity for company to improve its long-term market
position
Good strategy entails Looking for opportunities to leverage company strengths into
competitive advantage Using company strengths to attack the competitive weaknesses
of rivals
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(3) Using an Internal Audit
Internal Audit A thorough assessment of an organizations
various internal functional areas Strategic decision makers use the internal audit
to assess the organizations resources and
capabilities from the perspectives of itsdifferent functions
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Using an Internal Audit Six primary functional areas
Production-operations Marketing Research & development Financial and accounting Management, including HRM Information System
Depending on products, markets, and industries,individual organizational structures may vary and,therefore, may emphasize different sets of functionalareas
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(5) Capabilities Assessment Profile
Resembles the internal environmental analysis Similarity: Focuses on deeper evaluation of S&W Difference: Focuses only on an firms capabilities
Analysis of capabilities is complex Not as easily identified as organizations function or
even the value creating primary & support activities Complex nature of capabilities makes it hard for
competitors to imitate
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Capabilities Assessment Profile
Analysis Consists of two phases: Phase I: Identify distinctive capabilities
Phase II: Develop and leverage distinctive capabilities Identifying Distinctive Organizational Capabilities
Step 1 : Prepare current product-market profile
Emphasize organization-customer interactions What is the organization selling? Who are the organization selling to? Is the organization providing superior customer value &
desirable benefits?
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Capabilities Assessment Profile
Step 2: Identify sources of competitiveadvantage & disadvantage in the main product-
market segment Determine why customers choose the organizations
products vs. those of competitors Involves information on cost, product, and service
attributes When customers purchase What theyre actually purchasing What bundle of attributes satisfies their needs
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Capabilities Assessment Profile Step 3 : Describe all organizational capabilities &
competencies Examine resources, skills, & abilities of the various divisions Determine which resources, skills, & abilities lead to a
competitive advantage
Step 4 : Sort the core capabilities/competenciesaccording to strategic importance
Can capability provide wide access to a number of differentmarkets?
Does the capability provide tangible customer benefits? Is the capability difficult for competitors to imitate?
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Capabilities Assessment Profile
Step 5 : Identify and agree on the key capabilities orcompetencies Provide basis for resource allocation
Classifying an Organizations S&W Past performance trends
Measures such as financial ratios, operations efficiency, etc,
Specific goal or targets
Organizations goals are statements of desired outcomes Comparison against competitors
How are competitors doing?