STRATEGIC MANAGEMENT Strategic Management is all about identification and description of the strategies that managers can carry so as to achieve better performance and a competitive advantage for their organization. An organization is said to have competitive advantage if its profitability is higher than the average profitability for all companies in its industry. Strategic management can also be defined as a bundle of decisions and acts which a manager undertakes and which decides the result of the firm’s performance. The manager must have a thorough knowledge and analysis of the general and competitive organizational environment so as to take right decisions. The phrase “Strategic management” is sometimes used as a synonym for “strategy,” but the two terms are not the same. Strategy refers to a unique plan designed to achieve a competitive position in the market. It is also an interpretative plan that guides the organization to reach its goals and objectives. Whereas Strategic Management consists of analyses, decisions, and actions, an organization undertakes to create, implement, and sustain competitive advantage. Strategic management (Investopedia) – the ongoing process of setting an organization’s highlevel goals, developing plans of action, and effectively allocating resources to execute those plans. Vision and Mission Statements – A roadmap of where you want to go and how to get there Have you ever been involved in an organization or business that never seems to accomplish very much? Regardless of how hard you work, you just go in circles. The problem may be that you have not decided where you want to go and have not created a roadmap of how to get there. From the perspective of an organization, the problem may be that you are not focusing on what you want to achieve and how you will achieve it. Below are a series of steps or statements of how to give your organization direction. Vision – It provides a destination for the organization. Mission – This is a guiding light of how to get to the destination. These are critical statements for the organization and the individuals who run the organization. In short, strategic management is the process that defines that defines the organization’s strategy. This definition of strategic management entails 3 ongoing processes: 1. Analyses – Strategic management is concerned with the analysis of strategic goals (mission, vision, and strategic objectives) along with the internal and external environments of the organizations. 2. Decisions – Strategic decisions address two (2) basic questions: - What industries should we compete in? - And how should we compete in those industries? 3. Actions – Strategic actions require leaders to allocate necessary resources and to bring the intended strategies to reality. Vision – Big picture of what you want to achieve. Mission – General statement of how you will achieve the vision. Core values – How you will behave during the process. A companion statement often created with the vision and mission is a statement of core values. Once you have identified what your organization wants to achieve (vision) and generally how the vision will be achieved (mission), the next step is to develop a series of statements specifying how the mission will be utilized to achieve the vision: Strategies – Strategies are one or more ways to use the mission statement in order to achieve the vision statement. Although an organization will just have one vision statement and one mission statement, it may have several strategies. Goals – these are the general statements of what needs to be accomplished to implement a strategy. Objectives – Objectives provide specific milestones with a specific timeline for achieving a goal. Action Plans – These are specific implementation plans of how you will achieve an objective. Vision Statement – A mental picture of what you want to accomplish or achieve. For example, your vision may be a successful winery business or an economically active community. Vision of an Example Business – A successful family dairy business Vision Statement of Starbucks: To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.” Meaning: Aiming to be the leading purveyor means achieving leadership in ensuring its coffee and other products are of the best qualities. To address its "uncompromising principles" aspect, Starbucks aims at nurturing its principles, including the warm culture and ethical conduct. Starbucks nurtures its 'growth' element in the vision statement through the continuous global expansion of its chain by opening coffeehouses at new locations. Core Values – define the organization in terms of the principles and values the leaders will follow in carrying out the activities of the organization. Mission Statement – A general statement of how the vision will be achieved. The mission statement is an action statement that usually begins with the word "to". Mission of an Example Business – To provide unique and high quality dairy products to local consumers. Core Values of the Example Business: •Focus on new and innovative business ideas •Practice high ethical standards. •Respect and protect the environment. •Meet the changing needs and desires of clients and consumers. 3 key things your mission statement should answer (WHAT, HOW, WHY) (1) What does your company do? (2) How does your company do it? (3) Why does your company do it? Put your new mission statement to work There is a close relationship between the vision and mission. As the vision statement is a static mental picture of what you want to achieve, the mission statement is a dynamic process of how the vision will be accomplished. Mission Statement of Starbucks: To inspire and nurture the human spirit – one person one cup, and one neighborhood at a time. Meaning: Starbucks promotes a culture in which warmth and connection among employees, other company members, and customers are important. the company's warmth culture extend to its clients. When employees and customers use first names to address each other inside Starbucks coffeehouses. Also, the stores are strategically designed to bring warmth and a cozy atmosphere. These strategies create and maintain useful and positive connections between customers and employees. To create successful statements, you should keep the following concepts in minds. Simple – the vision and mission guide the everyday activities of every person involved in the business. Statements of vision and mission should be simple, concise and easy to remember. The statements need to capture the very essence of what your organization or business will achieve and how it will be achieved. So, the statements of vision and mission should be single thought that can easily be carried in the mind. This makes it easy for everyone in the organization to focus on them. To test the effectiveness of your statements, ask the leaders, managers, and employees to tell you the vision and mission of their organization. If they cannot instantaneously tell you both the vision and mission, the statements are of little use. But that doesn’t mean it will be easy to create the statements. It may require several drafts. Most statements are too long. People tend to add additional information and qualifications to the statements. Usually, the additional information just confuses the reader and clouds the essence of the statement. Each successive draft of the vision and mission should be simplified and clarify by using as few words as possible. Fluid Process – the statements are not “cast in stone.” They can be updated and modified if the organization changes its focus. It is often good to write the statements, use them for a period of time, and then revisit them a few months or a year later if needed. It may be easier to sharpen the focus of the statement at that time. Remember, the reason you are writing the statements is to clarify what you are doing. Unique and Complex Organizations – it is usually more important to write statements for nontraditional organizations where the purpose of the organization is unique. The same is true for complex organizations where It may be difficult to sift down to the essence of the existence organization. Strategies – A strategy is a statement of how you are going to achieve something. More specifically, a strategy is a unique approach of how you will use your mission to achieve your vision. Strategies are critical to the success of an organization because this where you begin outlining a plan for doing something. The more unique the organization, the more creative and innovative you need to be in crafting your strategies. A strategy is all about integrating organizational activities and utilizing and allocating scarce resources within the organizational environment so as to meet the present objectives. While planning a strategy, it is essential to consider that decisions are not taken in a vacuum and that any action taken by a firm is likely to be met by a reaction from those affected, competitors, customers, employees or suppliers. Strategy can also be defined as knowledge of the goals, the uncertainty of events and the need to take into consideration the likely or actual behavior of others. Strategy is the blueprint of decisions in an organization that shows its objective and goals, reduces the key policies, and plans for achieving these goals, and defines the business the company is the carry on, the type of economic and human organization it wants to be, and the contribution it plans to make its shareholders, customers, and society at large. Goals – A goal is a general statement of what you want to achieve. More specifically, a goal is a milestone (s) in the process of implementing a strategy. Examples of business goals are: •Increase profit margin •Increase efficiency •Capture a bigger market share •Provide better customer service •Improve employee training •Reduce carbon emissions Be sure the goals are focused on the important aspects of implementing a strategy. Be careful not to set too many goals or you may run the risk of losing focus. Also, design your goals so that they don’t contradict and interfere with each other. A goal should meet the following criteria: USAF Understandable: is it stated simply and easy to understand? Suitable: Does it assist in implementing a strategy of how the mission will achieve the vision? Acceptable: Does it fit with the values of the organization and its members/employees? Flexible: Can it be adapted and changed as needed? Objectives – an objective turns a goal’s general statement if what is to be accomplished into a specific, quantifiable, time-sensitive statement of what is going to be achieved and when it will be achieved. Examples of business objectives are: •Earn at least a 20 percent after-tax rate of return on our investment during the next fiscal year •Increase market share by 10 percent over the next three years. •Lower operating costs by 15 percent over the next two years through improvement in the efficiency of the manufacturing process. •Reduce the call-back time of customer inquiries and questions to no more than four hours Objectives should meet the following criteria: MSFCO Measurable: What specifically will be achieved and when will it be achieved? Suitable: Does it fit as a measurement for achieving the goal? Feasible: Is it possible to achieve? Commitment: Are people committed to achieving the objective? Ownership: Are the people responsible for achieving the objective included in the objectivesetting process? Action Plans – action plans are statements of specific actions or activities that will be used to achieve a goal within the constraints of the objective. Action plans. are specific actions that need to be taken for reaching the milestones within the timeline of the objectives. Conclusions Creating the statements described above may seem like a lot of busy work. But these statements will help you focus on the important aspects of your organization or business. If done properly, they can save money and time and increase the odds that your organization or business venture will be successful. Think of these statements as living documents that may change as the needs of the organization or business change. Too often, these statements are treated as "iconic relics" to be stored away in a safe place. But, if you don’t use them, you have wasted your time. What are internal and external environmental factors that affect business? A business concept that looks perfect on paper may prove imperfect in the real world. Sometimes failure is due to the internal environment – the company’s finances, personnel or equipment. Sometimes it’s the environment surrounding the company. Knowing how internal and external environmental factors affect your company can help your business thrive. External environment is a group of factors or conditions that are outside the organization but affect it to some extent. In business, this term commonly applies to elements related to out-of-control dimensions such as society, economy, regulations, and political system. Putting it All Together Externals: (ECPC) Vision. is what you want to accomplish. Mission. is a general statement of how you will achieve your vision. Strategies. are a series of ways of using the mission to achieve the vision. Goals. are statements of what needs to be accomplished to implement the strategy. Objectives. are specific actions and timelines for achieving the goal. 1. Economy In a bad economy, even a well-run business may not be able to survive. If customers lose their jobs or take jobs that can barely support them, they’ll spend less on sports, recreation, gifts, luxury goods and new cars. High interest rates on credit cards can discourage customers from spending. You can’t control the economy, but understanding it can help you spot threats and opportunities. An economic downturn affects people’s lives in many ways: higher unemployment, reduced economic activity, reductions in income and wealth, and greater uncertainty about future jobs and income. 2. Competition from other businesses Unless your company is unique, you’ll have to deal with competition. When you start your company, you fight against established, more experienced businesses in the same industry. After you establish yourself, you’ll eventually have to face newer firms that try to slice away your customers. Competition can make or break you – look at how many brickand-mortar bookstores crashed and burned competing with amazon. 3. Politics and government policy Changes in government policy can have huge effect on your business. The tobacco industry is a classic example. Since the 1950s, cigarette companies have been required to place warning labels on their products, and they lost the right to advertise on television. Smokers have fewer and fewer places they can smoke legally. The percentage of Americans who smoke has dropped by more than half, with a corresponding effect on industry revenues. 4. Customers and Suppliers Next to your employees, your customers and suppliers may be the most important people you deal with. Suppliers have a huge impact on your costs. The clout of any given supplier depends on scarcity: if you can’t buy anywhere else, your negotiating room is limited. The power of your customer depends on how fierce the competition for their dollars is, how good your products are, and whether your advertising makes customers want to buy from you, among other things. Internals: (EMC) 1. Employees and Managers Unless you’re a one-person show, your employees are a major part of your company’s internal environment. Your employees have to be good at their jobs, whether it’s writing code or selling product to strangers. Managers have to be good at handling lower-level employees and overseeing other parts of the internal environment. Even if everyone’s capable and talented, internal politics (actions and behaviors of those competing for status or power in the workplace) and conflicts can wreck a good company. 2. Money and Resources Even in a great economy, lack of money can determine whether your company survives or dies. When your cash resources are too limited, it affects the number of people you can hire, the quality of your equipment, and the amount of advertising you can buy. If you’re flush with cash, you have a lot more flexibility to grow and expand your business or endure economic downturn. 3. Company culture Your internal culture consists of the values, attitudes, and priorities that your employees live by. A cutthroat culture where every employee competes with one another creates a different environment from a company that emphasizes collaboration and teamwork. Typically, company culture flows from the top down. Your staff will infer your values based on the type of people you hire, fire, and promote. Let them see the values you want your culture to embody. Michael Porter’s Five Forces Porter’s five forces is a simple but powerful tool that you can use to identify the main sources of competition in your industry or sector. When you understand the forces affecting your industry, you can adjust. Your strategy, boost your profitability, and stay ahead of the competition. You can take fair advantage of a strong position or improve a weak one, and avoid taking wrong steps in the future. How do you use Porter's Five Forces? Think about each force in turn, and how it applies to your industry. Gather data on each force, and use it to help inform your future strategic decision making. What are the benefits of using Porter’s five forces? Allows you to gain valuable insights into your current market, or one that you’re considering moving into. This can help you to develop a strategy to succeed. What Are Porter's Five Forces? CSBTT He described them further in his later article, "The Five Competitive Forces That Shape Strategy." According to Porter, there are five forces that represent the key sources of competitive pressure within an industry They are: 1. Competitive Rivalry The first of porter’s five forces looks at the number and strength of your competitors. Consider how many rivals you have, who they are, and how the quality of their product compares with yours. In an industry where rivalry is intense, companies attract customers by cutting prices aggressively and launching high-impact marketing campaigns. This can make it easy for suppliers and buyers to go elsewhere if they feel that they’re not getting a good deal from you. On the other hand, where competitive rivalry is minimal, and no one else is doing what you do, then you’ll likely have tremendous competitor power, as well as healthy profits. Example: If you were setting up a haulage business, you'd likely be entering a crowded market. You'd have to consider many potential rivals, how much they charged, and whether they were able to discount deeply. You'd also need to think about their resources: you might be setting up to compete with international logistics companies, as well as local competitors. Remember that at this point the analysis should focus on your potential rivals. Only start thinking about your own offer when you've got your data together on the competition. 2. Supplier Power Suppliers gain power if they can increase their prices easily, or reduce the quality of their products. If your suppliers are the only ones who can supply a particular service, then they have a considerable supplier power. Even if you can switch suppliers, you need to consider how expensive it would be to do so. The more suppliers you have to choose from, the easier it will be to switch to a cheaper alternative. But if there are fewer suppliers, and you rely heavily on them, the stronger their position – and their ability to charge you more. This can impact your profitability, for example, if you’re forced into expensive contracts. Example: Let's say your business idea was to manufacture electronic devices. You'd have to assess your supply options for a range of specialist components. If one supplier dominated the components market, then they could raise their prices without worrying about their own competitors. This might affect the viability of your product. 3. Buyer Power If the number of buyers is low compared to the number of suppliers in an industry, then they have what’s known as “buyer power.” This means they may find it easy to switch to new, cheaper competitors, which can ultimately drive down prices. Think about how many buyers you have (that is, people who buy products or services from you). Consider the size of their orders, and how much it would cost them to switch to a rival. When you deal with only a few savvy customers, they have more power. But if you have many customers and little competition, buyer power decreases. Example: Buyer power is a significant factor in food retail. Think of large supermarkets that operate in a crowded, highly competitive market. This market has changed dramatically with the arrival of cheap, no-frills food discounters. Shoppers have strong buyer power here. That's why supermarkets have coupon schemes, loyalty cards, and aggressive discounting – to capture the largest share of buyers. These organizations in turn have strong buyer power with their own suppliers, using their influence to drive down the cost of food at the manufacturing level. 4. Threat of Substitution This refers to the likelihood of your customers finding a different way of doing what you do. It could be cheaper, or better, or both. The threat of substitution rises when customers find it easy to switch to another product, or when a new desirable product enters the market unexpectedly. Example: If your organization makes medical instruments, you may find your position being threatened by the rise of 3D printing. This enables instruments to be made from a wide range of materials, sometimes at a fraction of the cost of traditional methods. If a competitor gets it right, it can weaken your position and threaten your profitability. 5. Threat of New Entry. Your position can be affected by potential rivals’ ability to enter your market. If it takes little money and effort to enter your market and compete effectively, or if you have little protection for your key technologies, then rivals can quickly enter your market and weaken your position. However, if you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. These barriers can include complex distribution networks, high starting capital costs, and difficulties in finding suppliers who are not already committed to competitors. Existing large organizations may be able to use economies of scale to drive their costs down, and maintain competitive advantage over newcomers. If it costs customers too much to switch between one supplier and another, this can also be a significant barrier to entry. So can extensive government regulation of an industry. Example: Even industries that seem to be well protected against new entry can prove to be vulnerable. For many years, high-volume air travel was in the hands of a relatively small number of established airlines. The barriers to entry were formidable. Start-up costs were high, routes and take-off slots were mostly grabbed by the big operators, and the industry was strictly regulated. Even so, some small operators did manage to break into the market, mostly by offering no-frills, lowcost travel to popular destinations, and taking advantage of reduced regulation. These smaller, more agile operators now hold strong positions in the industry, particularly in short- to medium-haul travel. CORPORATE GOVERNANCE What is corporate governance? It is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from actions plans and internal controls to performance measurement and corporate disclosure. Key takeaways Corporate governance is the structure of rules, practices and processes used to direct and manage a company. A company’s board of directors is the primary force influencing corporate governance. Bad corporate governance can cast doubt on a company’s operations and its ultimate profitability. Corporate governance covers the areas of environmental awareness, ethical behavior, corporate strategy, compensation, and risk management. The basic principles of corporate governance are accountability, transparency, fairness, responsibility and risk management. It can facilitate the raising of capital. Good corporate governance can translate to rising share prices. It can lessen the potential for financial loss, waste, risk, and corruption. It is a game plan for resilience and long-term success. Understanding Corporate Governance Corporate Governance and the Board of Directors Governance refers specifically to the set of rules, controls, policies, and resolutions put in place to direct corporate behavior. A board of directors is pivotal in governance. Proxy advisors and shareholders are important stakeholders who can affect governance. The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members. They represent shareholders company. Communicating a firm’s corporate governance is a key component of community and investor relations. For instance, Apple Inc.’s investor relations site outlines its corporate leadership. (its executive team and board of directors). It provides corporate governance information including its committee charters and governance documents, such as bylaws, stock ownership guidelines and articles of incorporation. Most companies strive to have exceptional corporate governance. For many shareholders, it is not enough for a company merely to be profitable. It also must demonstrate good corporate citizenship through environmental awareness, ethical behavior, and sound corporate governance practices. Benefits of Corporate Governance Good corporate governance creates transparent rules and controls, provide guidance to leadership, and aligns the interest of shareholders, directors, and employees. It helps build trust with investors, the community, and public officials. Corporate governance can provide investors and stakeholders with a clear idea of a company’s direction and business integrity. It promotes long-term financial viability, opportunity, and returns. The board is tasked with making important decisions, such as corporate officer appointments, executive compensations, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized. Boards are often made up of insiders and independent members. Insiders are major shareholders, founders, and executives. Independent directors do not share the ties that insiders have. They are chosen for their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interest with those of the insiders. The board of directors must ensure that the company’s corporate governance policies incorporate corporate strategy, risk management, accountability, transparency, and ethical business practices. Important: a board of directors should consist of a diverse group of individuals, including those who have skills and knowledge of the business and those who can bring a fresh perspective from outside of the company and industry. the political model. However, the shareholder model is the principal model. The Principles of Corporate Governance The shareholder model is designed so that the board of directors and shareholders are in control. Stakeholders such as vendors and employees, though acknowledged, lack control. While there can be as many principles as company believes make sense, some of the more well-known include the following. Fairness The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration. Transparency The board should provide timely, accurate, and clear information about such things as financial performance, conflicts of interest, and risks to shareholders and other stakeholders. Risk Management The board and management must determine risks of all kinds and how best to control them. They must act on those recommendations to manage them. They must inform all relevant parties about existence and status of risks. Responsibility The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a CEO. It must act in the best interests of a company and its investors. Accountability The board must explain the purpose of a company’s activities and the results of its conduct. It and company leadership are accountable for the assessment of a company’s capacity, potential, and performance. It must communicate issues of importance to shareholders. Corporate Governance Models The Anglo-American Model This model can take various forms, such as the shareholder model, the stewardship model, and Management is tasked with running the company in a way that maximizes shareholder interest. Importantly, proper incentives should be made available to align management behavior with the goals of shareholder/owners. The model accounts for the fact that shareholders provide the company with funds and may withdraw that support if dissatisfied. This can keep management working efficiently and effectively. The board should consist of both insiders and independent members. Although, traditionally, the board chairman and the CEO can be the same person, this model seeks to have two different people hold those roles. The success of this corporate governance model depends on ongoing communications between the board, company management, and the shareholders. Important decisions to be made are put to shareholders for a vote. The Continental Model Two groups represent the controlling authority under continental model. They are the supervisory board and the management board. In this two-tiered system, the management board is comprised of company insiders such as its executives. The supervisory board is made up of outsiders, such as shareholders and union representatives. Banks with stakes in a company also could have representatives on the supervisory board. The two boards remain completely separate. The size of the supervisory board is determined by a country’s law. It can’t be changed by shareholders. National Interests have a strong influence on corporations with this model of corporate governance. Companies can be expected to align with government objectives. This model also considers stakeholder engagement for a great value, as they can support and strengthen a company’s continued operations. The Japanese Model The key players in Japanese model of corporate governance are banks, affiliated entities, major shareholders called keiretsu (who may be invested in common companies or have trading relationships), management, and the government. Smaller, independent, individual shareholders have no role or voice. Together, these key players establish and control corporate governance. The board of directors is usually comprised insiders, including company executives. Keiretsu may remove directors form the board of profits wane. • Policies and procedures for reconciling conflicts of interest (how the company approaches business decisions that might conflict with its mission statement) • The members of the board of directors (their stake in profits or conflicting interests) • Contractual and social obligations (how a company approaches areas such as climate change) • Relationships with vendors • Complaints received from shareholders and how they were addressed • Audits (the frequency of internal and external audits and how issues have been handled) Types of bad governance practices include: • Companies that do not cooperate sufficiently with auditors or do not select auditors with the appropriate scale, resulting in the publication of spurious or noncompliant financial documents • Bad executive compensation packages that fail to create an optimal incentive for corporate officers. • Poorly structured boards that make it too difficult for shareholders to oust ineffective incumbents. Corporate governance Scandal at Apple The government affects the activities of corporate management via its regulations and policies. In this model, corporate transparency is less likely due to the concentration of power and the focus on interests of those with that power. Corporate governance refers to the rules and procedures that must be followed by the company and enhance its control and direction. Corporate governance shows the company’s directions and ensures that its operations are streamlined based on its vision. How to Assess Corporate Governance As an investor, you want to select companies that practice good corporate governance in the hope of avoiding losses and other negative consequences such as bankruptcy. You can research certain areas of a company to determine whether or not it's practicing good corporate governance. These areas include: • Disclosure practices • Executive compensation structure (whether it's tied only to performance or also to other metrics) • Risk management (the checks and balances on decision-making) In most cases, corporate governance is evident in the management and seeks to balance the interests of different stakeholders, including suppliers, financiers, community, government, and customers. It is a very complicated element since it involves controls, quality measures, disclosures, and anything related to the concerned parties. In some cases, the corporate governance system is under immense pressure to deliver, especially ensuring the stakeholders, particularly shareholders, benefit. In some cases, the efforts by corporate governance affect other stakeholders negatively. One such case involved Apple Company in 2017, where the company admitted having programmed the battery so that it slowed down after some time, forcing users to purchase another one. Internal Analysis is to ideate the UI direction for the next-gen product. This goal helps you remain focused during the following steps. INTERNAL ENVIRONMENT ANALYSIS 2. Pick a template framework Why conduct an internal analysis? An internal analysis highlights an organization’s strengths and weaknesses in relation to its competencies, resources, and competitive advantages. The second step is to download our Free Internal Analysis Toolkit and choose the Internal Analysis Framework Template most aligned with the problem you're trying to solve and your goal. 3. Data collation Once complete, the organization should have a clear idea of where it’s excelling, where it’s doing okay, and where its current deficits and gaps are. The analysis gives management the knowledge to leverage the organization’s strengths, expertise, and opportunities. It also enables management to develop strategies that mitigate threats and compensate for identified weaknesses and disadvantages. When your business strategy is based on findings and not consumptions, you can be confident that you’re funneling your resources, time, human capital, and focus effectively and efficiently. An internal analysis it the process of an organization examining the internal components to assess its resources, assets, characteristics, competencies, capabilities, and competitive advantages. this helps management during the decision-making, strategy formulation, and execution processes by identifying the organization’s strengths and weaknesses. So simply put, an internal analysis enables a firm to determine what the firm can do increasing internal capability to manage execution and change. An internal analysis in strategic management should serve as the foundation of any business strategy. How to conduct an internal analysis 1. Set the goal The first step is to set the goal, this is essentially the answer as to why you're conducting an Internal Analysis. For example, the desired outcome of this Utilize all internal sources to collate information to assist in achieving your goal. In the context of our example from above, research would include interviewing customer success managers, engineers, etc to gain a better understanding of the gap between the current and desired future state of the UI. 4. Framework time Now you take into account all of the data you collected from your research and execute it in the chosen framework. Once you have completed the framework leverage the insights to best answer the question of why you conducted an Internal Analysis. 5. Create your plan Once you have answered that question, take the insights and create a strategic plan that enables you to reach that initial goal. So in the case of our goal, to ideate the UI direction for the next-gen product, the vision statement in our strategic plan could be something like, to create a seamless UI that improves user experience through increased retention time. not, why. In addition, it helps to pinpoint flaws in resource allocation, planning, production, etc. Why choose the GAP analysis framework While other internal analysis tools, such as SWOT analysis, offer a more comprehensive study of the internal environment, GAP analysis is a better framework for fine-tuning a single process (or a selected few) instead of the company as a whole. Strategy evaluation A strategy evaluation analyzes the results of a strategic plan's implementation. Internal Analysis Tools Before conducting an internal analysis, you need to decide what tools you will use. There are many tools and frameworks, and each one can be valuable - but each one is also best for a specific purpose. The role played by Internal Analysis in strategic management is key to organizations having a robust strategy. To help you choose the right framework, we've compiled a list of some of the most popular and effective ones, together with descriptions of what they’ll help you achieve. GAP analysis GAP analysis is an evaluation tool that allows organizations to identify performance deficiencies and internal weaknesses. It’s a simple and practical framework. It helps you compare your current organizational state to your desired future state. It helps you identify and understand the gaps between the two states and makes it easier to create a series of actions to bridge those gaps. GAP analysis helps management identify if their organization is performing to its potential, and if It's useful to conduct a strategy evaluation regularly to see if everyone understands and acts according to your business strategy. You might want to conduct such an evaluation every six months, every year, or after a revamped business strategy implementation. It mostly depends on the number of changes you’re trying to implement. The strategy evaluation process involves looking back at the goals of your strategic plan and assessing how well your strategic management initiatives fared in achieving them. Why choose the Strategy evaluation framework Strategy evaluation shows how your strategy implementation process fares against “business as usual”. You might have created a great strategic plan, but it's of no use if it’s not being executed. Use this framework to align your strategy with your company’s culture. SWOT analysis SWOT analysis is one of the better-known and most commonly used business analysis frameworks. It’s popular due to its simplicity (it covers both an internal and external analysis) and its efficacy. Its name is derived from the four factors that form the SWOT matrix: Strengths (internal) Weaknesses (internal) Opportunities (external) Threats (external) SWOT analysis can uncover a sustainable niche in your market and grow your market share. It allows organizations to discover external opportunities they can exploit while simultaneously identifying internal factors that cause weaknesses. It also helps to reduce the risk of impending threats. Here’s a simplified Internal Analysis example of Starbucks SWOT: Strengths Global leader in coffee and beverage retailing. Strong brand equity and great brand recall. One of the largest coffee houses globally, which allows it to price its products for the middle-income group. Weaknesses Heavy dependence on coffee beans. Criticized in the past for procuring coffee beans from impoverished third-world farmers. The price is still costly for many working consumers. Opportunities Should expand to the tier-II cities of the emerging countries in order to further increase its customer base. Should expand its product portfolio to venture into the full spectrum food and beverage business. Threats Profitability is always at the mercy of the rising prices of coffee beans and the supply network. Strong competition from the local coffeehouses and specialty stores that offer similar products at a cheaper price. Starbucks or any company can then use such analysis to develop strategic alternatives that will help it meet its goals. Why choose the SWOT analysis framework It helps organizations distinguish themselves from competitors by understanding their unique capabilities and sources of competitive advantage, which can help them compete in their given marketplace. If SWOT analysis seems like the framework you need, check out our SWOT template here. VRIO analysis The VRIO framework is a great tool for assessing an organization's internal environment. It looks at an organization's internal resources and categorizes them based on the overall value they contribute to the organization. VRIO is a framework that helps you create sustainable competitive advantages. It enables you to identify your unique strengths and transform them from short-term competitive edges into sustainable performance drivers. Our VRIO framework guide shows you exactly how to do it. Why choose the VRIO analysis framework If you're looking to develop a strategy that builds on your organization's competitive advantage, VRIO analysis is the tool you need. It will give you a deeper understanding of your assets and your organization’s added value. What is Vrio Analysis? VRIO Analysis is an internal analysis tool, used by organizations to categorize their resources based on whether they hold certain traits outlined in the framework. This categorization then allows organizations to identify the company resources that provide a competitive advantage. The VRIO Analysis is an Internal Analysis tool. The VRIO Model: Valuable Rare Inimitable Organized trouble. Therefore it's only a temporary competitive advantage. Hard to Imitate We'll go into more detail about each of the dimensions in a moment. First, we would like to explain why the VRIO analysis is such a popular tool. Jay B Barney conceived the VRIO analysis in 1991. Though we should mention, Barney originally conceptualized the framework as VRIN, the last dimension in the framework was refined over the years and the N in VRIN became an O. The framework is simple to understand, easy to use, and can provide enormous value for organizations looking to stay ahead of competitors. This has made the tool an obvious choice for many companies looking to analyze their internal environment. The premise of identifying a firm's resource as a competitive advantage is whether it passes through the dimensions of the framework. Resources are hard to imitate if they are extremely expensive for another organization to acquire them. A resource may also be hard for an organization to imitate if it's protected by legal means, such as patents or trademarks. Resources are considered a competitive advantage if they're valuable, rare, and hard to imitate. However, organizations that aren't organized to fully take advantage of the resource, may mean the resource is an unused competitive advantage. Organized to Capture Value An organization's resource is organized to capture value only if it is supported by the processes, structure, and culture of the company. A resource that is valuable, rare, hard to imitate, and organized to capture value is a long-term competitive advantage. The VRIO Framework Explained Valuable When a resource is valuable, it's providing the organization with some sort of benefit. However, a resource that is valuable and doesn't fit into any of the other dimensions of the framework, is not a competitive advantage. An organization can only achieve competitive parity with a resource that is valuable and neither rare nor hard to imitate. Rare A resource that is uncommon and not possessed by most organizations is rare. When a resource is both valuable and rare, you have a resource that gives you a competitive advantage. A resource can not confer any advantage for a company if it’s not organized to capture the value. Only a firm that is capable to exploit valuable, rare, and imitable resources can achieve sustained competitive advantage. VRIO Analysis Example To use the framework, you'll need to first define your resources. Resources may be tangible or intangible in nature and generally fall into one of the following categories: Financial Resources such as money, shares, bonds, and debentures. Human resources such as the skills of your people and the knowledge of your The competitive advantage achieved from a resource that is both valuable and rare is usually short lived though. Competitors will quickly realize and can imitate the resource without too much people. Material resources such as raw materials, facilities, machinery, and equipment. Non-material resources such as patents, brand names, and intellectual property. VRIO Resources With your resources categorized through the VRIO framework, you can now start to analyze each. Once you've defined all your resources, take each resource through the VRIO framework and categorize each based on the traits it holds. Categorize resources into one of the following groups: competitive parity, temporary competitive advantage, unused competitive advantage, or longterm competitive advantage. The framework below should help you visualize the process. Are there any competitive implications? Is there a potential for improvement in certain resources? The aim is to find the resources that have the potential to move from their current category into a higher one. For example, an organization may have a resource that is valuable and rare, such as a certain invention they created. They deem their invention a Temporary Competitive Advantage as per the VRIO analysis. The organization comes to this conclusion because they decide it wouldn't be difficult or expensive for a competitor to imitate the invention if they wanted to. Upon analysis, the organization sees an opportunity to move their Temporary Competitive Advantage to a higher category. After some analysis, they come to the conclusion that if they can obtain a patent for their invention, the resource would then become very difficult for competitors to imitate. The resource would then enter a higher category, as it is valuable, rare, and hard to imitate. The process of analyzing your internal environment is extremely important in the strategic planning process. While this post has only focused on the VRIO framework, there are many other internal analysis tools that can be used by organizations to assist them when strategic planning. Deepest Analysis Deepest analysis is a tool used in strategic management to assess macro-environmental factors. By taking an in-depth look at these six factors (demographic, economic, political, environmental, social-cultural, and technological), management can better understand that industry un which they are competing. Trends at the intersection By determining relationships between the deepest factors, an industry can be further investigated through a “trends at the intersection” analysis. The overlapping trends provide clues as to where the industry is going. Funneling Approach Many companies use a “funneling approach” in order to further break down the analysis from a macro to micro environment. The analysis begins with a broad industry overview and then breaks that down into smaller sub-segment trends for an easier analysis. Opportunities and Threats After performing the DEPEST analysis, trends at the intersection analysis, and funneling approach, management should have a better understanding of potential opportunities and threats within their industry. The following opportunities and threats are based on the macro-environmental factors and help to conclude the attractiveness of the industry. Porter's Five Forces investigates the attractiveness of an industry by focusing on the threat level of various factors influencing the industry. These forces include: bargaining power of buyer bargaining power of suppliers threat of new entrants threat from substitutes rivalry among existing players.
