Lect 3 internal-analysis

3–3

External Analyses’ OutcomesExternal Analyses’ Outcomes

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

OpportunitieOpportunities and s and threatsthreats

3–4

Internal Analyses’ Outcomes Internal Analyses’ Outcomes

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

Unique resources, Unique resources, capabilities, and capabilities, and competenciescompetencies((required forrequired for sustainable sustainable competitive competitive advantageadvantage))

Components of Internal Analysis Leading to Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitive Advantage and Strategic CompetitivenessCompetitiveness

COMPETENCE ANALYSISCOMPETENCE ANALYSIS

CORE COMPETENCECORE COMPETENCE

• Core competence Core competence is is defined as the defined as the combination of individual combination of individual technologies and technologies and production skills that production skills that underlie a company’s underlie a company’s product lines.product lines.

• It should relate to an activity or process that It should relate to an activity or process that inherently underlies the inherently underlies the value value in the product or in the product or service as perceived by the customer.service as perceived by the customer.

• It should lead to a It should lead to a level of performance level of performance in a in a product or process which is significantly better product or process which is significantly better than those of competitors.than those of competitors.

• It should be It should be robust.robust.

TO ACHIEVE CORE TO ACHIEVE CORE COMPETENCECOMPETENCE

• Distinctive competence is the unique capability Distinctive competence is the unique capability

that helps an organization in capitalizing upon a that helps an organization in capitalizing upon a particular opportunity; the competitive edge it particular opportunity; the competitive edge it may give a firm in the marketplace.may give a firm in the marketplace.

• The focus in distinctive competence is on The focus in distinctive competence is on exploiting a market opportunity.exploiting a market opportunity.

DISTINCTIVE COMPETENCE DISTINCTIVE COMPETENCE

• Strategic competence is the Strategic competence is the • competence level required to formulate, competence level required to formulate,

implement and produce results with a particular implement and produce results with a particular strategy.strategy.

• It may involve combination or convergence of It may involve combination or convergence of different capabilities.different capabilities.

STRATEGIC COMPETENCESTRATEGIC COMPETENCE

• Threshold competence is the competence level Threshold competence is the competence level required just for survival in the market or required just for survival in the market or business.business.

• Companies with threshold competence can over Companies with threshold competence can over time, graduate to a higher level of competence.time, graduate to a higher level of competence.

• Continued threshold competence can lead to Continued threshold competence can lead to closure of business also.closure of business also.

THRESHOLD COMPETTENCETHRESHOLD COMPETTENCE

COMPETENCE VERSUS CAPABILITY: THE COMPETENCE VERSUS CAPABILITY: THE WALMART STORYWALMART STORY

• ‘‘Everyday low prices’ policyEveryday low prices’ policy

• ‘‘Relentless focus’ on Relentless focus’ on customer satisfaction.customer satisfaction.

• ‘‘Cross-docking’Cross-docking’

• Installed a private satellite Installed a private satellite communication network communication network which transmits point-of-sale which transmits point-of-sale data on daily basis.data on daily basis.

• Fast and efficient Fast and efficient transportation system.transportation system.

• Stock options and profit Stock options and profit sharing for HR sharing for HR

CAPABILITIES DIFFER FROM CORE COMPETENCES: CAPABILITIES DIFFER FROM CORE COMPETENCES: THE CASE OF HONDATHE CASE OF HONDA

• Expertise in ‘dealer Expertise in ‘dealer management’management’

• Skill at ‘product Skill at ‘product realization’realization’

IMPACT OF CHANGING COMPETENCE ON IMPACT OF CHANGING COMPETENCE ON REVENUE GROWTHREVENUE GROWTH

COMPETENCES, RESOURCES AND COMPETENCES, RESOURCES AND COMPETITIVE POSITIONSCOMPETITIVE POSITIONS

Competitive AdvantageCompetitive Advantage

• Firms achieve strategic competitiveness and Firms achieve strategic competitiveness and earn above-average returns when their core earn above-average returns when their core competencies are effectively:competencies are effectively: Acquired.Acquired. Bundled.Bundled. Leveraged.Leveraged.

• Over time, the benefits of any value-creating Over time, the benefits of any value-creating strategy can be duplicated by competitors.strategy can be duplicated by competitors.

Competitive Advantage (cont’d)Competitive Advantage (cont’d)

• Sustainability of a competitive advantage is a Sustainability of a competitive advantage is a function of:function of:

The rate of core competence obsolescence due to The rate of core competence obsolescence due to environmental changes.environmental changes.

The availability of substitutes for the core The availability of substitutes for the core competence.competence.

The difficulty competitors have in duplicating or The difficulty competitors have in duplicating or imitating the core competence.imitating the core competence.

The Challenge of Internal AnalysisThe Challenge of Internal Analysis

• Strategic decisions in terms of the firm’s Strategic decisions in terms of the firm’s resources, capabilities, and core competencies:resources, capabilities, and core competencies:

Are non-routineAre non-routine

Significantly influence the firm’s ability to earn Significantly influence the firm’s ability to earn above-average returns.above-average returns.

The Challenge of Internal Analysis The Challenge of Internal Analysis (cont’d)(cont’d)• To develop and use core competencies, To develop and use core competencies,

managers must have:managers must have:

Self-confidenceSelf-confidence

The capacity to deal with uncertainty and The capacity to deal with uncertainty and complexitycomplexity

A willingness to hold people (and themselves) A willingness to hold people (and themselves) accountable for their workaccountable for their work

Resources, Capabilities and Core Resources, Capabilities and Core CompetenciesCompetencies

• ResourcesResources Are the source of a firm’s Are the source of a firm’s

capabilities.capabilities. Are broad in scope.Are broad in scope. Cover a spectrum of Cover a spectrum of

individual, social and individual, social and organizational organizational phenomena.phenomena.

Alone, do not yield a Alone, do not yield a competitive advantage.competitive advantage.

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources•TangibleTangible•IntangibleIntangible

CapabilitiesCapabilities

CoreCoreCompetenciesCompetencies

COST MANAGEMENT, COST COMPETENCES, COST COST MANAGEMENT, COST COMPETENCES, COST EFFICIENCYEFFICIENCYAND COST EFFECTIVENESSAND COST EFFECTIVENESS

SOURCES OF COST EFFICIENCYSOURCES OF COST EFFICIENCY

THE EXPERIENCE CURVETHE EXPERIENCE CURVE

SOURCES OF COST EFFECTIVENESSSOURCES OF COST EFFECTIVENESS

ResourcesResources

• ResourcesResources Are a firm’s assets, Are a firm’s assets,

including people and including people and the value of its brand the value of its brand name.name.

Represent inputs into Represent inputs into a firm’s production a firm’s production process, such as:process, such as:

• Capital equipmentCapital equipment• Skills of employeesSkills of employees• Brand namesBrand names• Financial resourcesFinancial resources• Talented managersTalented managers

• Types of ResourcesTypes of Resources Tangible resourcesTangible resources

• Financial resourcesFinancial resources

• Physical resourcesPhysical resources

• Technological Technological resourcesresources

• Organizational Organizational resourcesresources

Intangible resourcesIntangible resources• Human resourcesHuman resources

• Innovation resourcesInnovation resources

• Reputation resourcesReputation resources


• CapabilitiesCapabilities Represent the capacity to deploy Represent the capacity to deploy

resources that have been resources that have been purposely integrated to achieve a purposely integrated to achieve a desired end statedesired end state

Emerge over time through complex Emerge over time through complex interactions among tangible and interactions among tangible and intangible resourcesintangible resources

Often are based on developing, Often are based on developing, carrying and exchanging carrying and exchanging information and knowledge through information and knowledge through the firm’s human capitalthe firm’s human capital






• Capabilities (cont’d)Capabilities (cont’d) The foundation of many The foundation of many

capabilities lies in:capabilities lies in:• The unique skills and The unique skills and

knowledge of a firm’s knowledge of a firm’s employeesemployees

• The functional expertise of The functional expertise of those employeesthose employees

Capabilities are often Capabilities are often developed in specific developed in specific functional areas or as part functional areas or as part of a functional area.of a functional area.






• Four criteria for Four criteria for determining strategic determining strategic capabilities:capabilities:

Value Value

RarityRarity

Costly-to-imitateCostly-to-imitate

NonsubstitutabilityNonsubstitutability






• Core CompetenciesCore Competencies Resources and capabilities that Resources and capabilities that

are the sources of a firm’s are the sources of a firm’s competitive advantage:competitive advantage:

• Distinguish a company Distinguish a company competitively and reflect its competitively and reflect its personality.personality.

• Emerge over time through an Emerge over time through an organizational process of organizational process of accumulating and learning accumulating and learning how to deploy different how to deploy different resources and capabilities.resources and capabilities.






• Core CompetenciesCore Competencies Activities that a firm performs Activities that a firm performs

especially well compared to especially well compared to competitors.competitors.

Activities through which the firm Activities through which the firm adds unique value to its goods adds unique value to its goods or services over a long period of or services over a long period of time.time.





Building Core CompetenciesBuilding Core Competencies

• Four Criteria of Four Criteria of Sustainable Competitive Sustainable Competitive AdvantageAdvantage

Valuable capabilitiesValuable capabilities

Rare capabilitiesRare capabilities

Costly to imitateCostly to imitate

NonsubstituableNonsubstituable


• ValuableValuable• RareRare• Costly to imitateCostly to imitate• NonsubstitutableNonsubstitutable

Four Criteria of Four Criteria of Sustainable Sustainable AdvantagesAdvantages

Building Sustainable Competitive Building Sustainable Competitive AdvantageAdvantage • Valuable capabilitiesValuable capabilities

Help a firm neutralize Help a firm neutralize threats or exploit threats or exploit opportunities.opportunities.

• Rare capabilitiesRare capabilities Are not possessed by Are not possessed by

many others.many others.




Building Sustainable Competitive Building Sustainable Competitive AdvantageAdvantage • Costly-to-Imitate CapabilitiesCostly-to-Imitate Capabilities

HistoricalHistorical• A unique and a valuable A unique and a valuable

organizational culture or brand organizational culture or brand namename

Ambiguous causeAmbiguous cause• The causes and uses of a The causes and uses of a

competence are unclearcompetence are unclear

Social complexitySocial complexity• Interpersonal relationships, Interpersonal relationships,

trust, and friendship among trust, and friendship among managers, suppliers, and managers, suppliers, and customerscustomers


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


Building Sustainable Competitive Building Sustainable Competitive AdvantageAdvantage

• Nonsubstitutable Nonsubstitutable CapabilitiesCapabilities No strategic equivalentNo strategic equivalent

• Firm-specific knowledgeFirm-specific knowledge

• Organizational cultureOrganizational culture

• Superior execution of the Superior execution of the chosen business modelchosen business model




Outcomes from Combinations Outcomes from Combinations of the Four Criteriaof the Four Criteria

Valuab

le?

Rare?

Costly

to Im

itate

?

Nonsubst

ituta

ble?

CompetitiveConsequences

PerformanceImplications

NoNo NoNo NoNo NoNo CompetitiveDisadvantageCompetitiveDisadvantage

Below AverageReturnsBelow AverageReturns

YesYes NoNo NoNo Yes/NoYes/No

CompetitiveParityCompetitiveParity

Average ReturnsAverage Returns

YesYes YesYes NoNo Yes/NoYes/No

Temporary Com-petitive AdvantageTemporary Com-petitive Advantage

Above Average to Average ReturnsAbove Average to Average Returns

YesYes YesYes YesYes YesYes Sustainable Com-petitive AdvantageSustainable Com-petitive Advantage

Above AverageReturnsAbove AverageReturns

The Basic Value The Basic Value ChainChain

Value Chain AnalysisValue Chain Analysis

• Allows the firm to understand the parts of its Allows the firm to understand the parts of its operations that create value and those that do operations that create value and those that do not.not.

• A template that firms use to:A template that firms use to:

Understand their cost position.Understand their cost position.

Identify multiple means that might be used to facilitate Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy.implementation of a chosen business-level strategy.

Value Chain Analysis (cont’d)Value Chain Analysis (cont’d)

• Primary activities involved with: Primary activities involved with:

A product’s physical creationA product’s physical creation

A product’s sale and distribution to buyersA product’s sale and distribution to buyers

The product’s service after the saleThe product’s service after the sale

• Support ActivitiesSupport Activities

Provide the assistance necessary for the primary Provide the assistance necessary for the primary activities to take place.activities to take place.

Value Chain Analysis (cont’d)Value Chain Analysis (cont’d)

• Value ChainValue Chain Shows how a product moves from the raw-material Shows how a product moves from the raw-material

stage to the final customer.stage to the final customer.

• To be a source of competitive advantage, a To be a source of competitive advantage, a resource or capability must allow the firm:resource or capability must allow the firm: To perform an activity in a manner that is superior to To perform an activity in a manner that is superior to

the way competitors perform it, orthe way competitors perform it, or

To perform a value-creating activity that competitors To perform a value-creating activity that competitors cannot completecannot complete

OutsourcingOutsourcing

• The purchase of a value-creating activity from an The purchase of a value-creating activity from an external supplierexternal supplier Few organizations possess the resources and Few organizations possess the resources and

capabilities required to achieve competitive superiority capabilities required to achieve competitive superiority in all primary and support activities.in all primary and support activities.

• By performing fewer capabilities:By performing fewer capabilities: A firm can concentrate on those areas in which it can A firm can concentrate on those areas in which it can

create value.create value. Specialty suppliers can perform outsourced Specialty suppliers can perform outsourced

capabilities more efficiently.capabilities more efficiently.

Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing

• Improving business focusImproving business focus Helps a company focus on broader business issues Helps a company focus on broader business issues

by having outside experts handle various operational by having outside experts handle various operational details.details.

• Providing access to world-class capabilitiesProviding access to world-class capabilities The specialized resources of outsourcing providers The specialized resources of outsourcing providers

makes world-class capabilities available to firms in a makes world-class capabilities available to firms in a wide range of applications.wide range of applications.

Strategic Rationales for Outsourcing Strategic Rationales for Outsourcing (cont’d)(cont’d)• Accelerating re-engineering benefitsAccelerating re-engineering benefits

Achieves re-engineering benefits more quickly by Achieves re-engineering benefits more quickly by having outsiders—who have already achieved world-having outsiders—who have already achieved world-class standards—take over process.class standards—take over process.

• Sharing risksSharing risks Reduces investment requirements and makes firm Reduces investment requirements and makes firm

more flexible, dynamic and better able to adapt to more flexible, dynamic and better able to adapt to changing opportunities.changing opportunities.

• Freeing resources for other purposesFreeing resources for other purposes Redirects efforts from non-core activities toward those Redirects efforts from non-core activities toward those

that serve customers more effectively.that serve customers more effectively.

Outsourcing IssuesOutsourcing Issues• Seeking greatest valueSeeking greatest value

Outsource only to firms possessing a core Outsource only to firms possessing a core competence in terms of performing the primary or competence in terms of performing the primary or supporting the outsourced activity.supporting the outsourced activity.

• Evaluating resources and capabilitiesEvaluating resources and capabilitiesDo notDo not outsource activities in which the firm itself outsource activities in which the firm itself

can create and capture value.can create and capture value.

• Environmental threats and ongoing tasksEnvironmental threats and ongoing tasksDo notDo not outsource primary and support activities that outsource primary and support activities that

are used to neutralize environmental threats or to are used to neutralize environmental threats or to complete necessary ongoing organizational tasks.complete necessary ongoing organizational tasks.

Outsourcing Issues (cont’d)Outsourcing Issues (cont’d)

• Nonstrategic team resourcesNonstrategic team resourcesDo notDo not outsource capabilities critical to the firm’s outsource capabilities critical to the firm’s

success, even though the capabilities are not actual success, even though the capabilities are not actual sources of competitive advantage.sources of competitive advantage.

• Firm’s knowledge baseFirm’s knowledge baseDo notDo not outsource activities that stimulate the outsource activities that stimulate the

development of new capabilities and competencies.development of new capabilities and competencies.

Cautions and RemindersCautions and Reminders• Never take for granted that core competencies will Never take for granted that core competencies will

continue to provide a source of competitive advantage.continue to provide a source of competitive advantage.

• All core competencies have the potential to become All core competencies have the potential to become core core rigiditiesrigidities——former core competencies that now generate former core competencies that now generate inertia and stifle innovation.inertia and stifle innovation.

• Determining what the firm can do through continuous and Determining what the firm can do through continuous and effective analyses of its internal environment will increase effective analyses of its internal environment will increase the likelihood of long-term competitive success.the likelihood of long-term competitive success.

Economy & Finance

Lect 3 internal-analysis