Internal Environment Analysis University of Colombo Determining what the firm can do through continuous and effective analyses of its internal environment increase the long-term competitive success Areas need to be considered for internal analysis The organization’s resources, capabilities The way in which the organization configures and co-ordinates its key valueadding activities The structure of the organization and the characteristics of its culture Outcomes • • • • Strengths Weakness Capabilities Core competencies S/W • A strength is a resource or capability controlled by or available to a firm that gives it an advantage relative to its competitors in meeting objectives. • A weakness is a limitation or deficiency in one or more of a firm’s resources or capabilities relative to its competitors that create a disadvantage in effectively meeting objectives. Identify internal capabilities ….. 6 You have….. only 7 Approaches for scanning and analyzing Internal Variables • Functional Analysis • Core Competencies Analysis • Value Chain Analysis 8 The Resource-Based View of the Firm The Resource-Based View: Elements of Competitive Advantage Source: Adapted from Peteraf (1993) and Ghemawat (1991). Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources What a firm Has... Resources represent inputs into a firm’s production process... Resources Resources are assets employed in the activities and processes of the organization. They can be tangible or intangible. They can be obtained externally (organizationaddressable) or internally generated (organizationspecific). They can be specific and non-specific: Specific resources can only be used for highly specialized purposes and are very important to the organization in adding value to goods and services. Assets that are less specific are less important in adding value, but are more flexible. Capabilities What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities What a firm Does... Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees. Capabilities What a firm Does... Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage. Competencies vs. Core Competencies vs. Distinctive Competencies • A competency is an internal capability that a company performs better than other internal capabilities. • A core competency is a well-performed internal capability that is central, not peripheral, to a company’s strategy, competitiveness, and profitability. • A distinctive competence is a competitively valuable capability that a company performs better than its rivals. Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Intraorganizational Conflicts among people making managerial decisions and those affected by them Distinctive Competence For a strategic capability to be a Distinctive Competence, it must be: What a firm Does... that is Strategically Valuable Valuable Rare Costly to Imitate Exploitable by the Organization Distinctive Competence What a firm Does... that is Strategically Valuable Valuable Capabilities that help a firm neutralize threats or exploit opportunities Rare Capabilities that are not possessed by many others Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity What Criteria Make Core Competencies Costly to Imitate? Unique Historical Conditions An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances Example: Sampath Bank ATM Causal Ambiguity This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage Eg: Core of Siddalepa Social Complexity Occurs when the firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers Resource Imitation Distinctive Competence Valuable What a firm Does... that is Strategically Valuable Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment Rare Capabilities that are possessed by few, if any, current or potential competitors Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Exploitable by the Organization Capabilities that do not have strategic equivalents, such as firmspecific knowledge or trust-based relationships Distinctive Competence Resources Distinctive Competence strategic capability • Inputs to a firm’s production process The source of Capability Does the capability satisfy the criteria of sustainable competitive advantage? • Integration of a team of resources YES NO Capability • A nonstrategic team of resources Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Valuable Rare Costly to Exploited by the Imitate Organization Competitive Consequences Performance Implications Below Average Returns NO NO NO NO Competitive Disadvantage YES NO NO YES/NO Competitive Parity Average Returns YES/NO Temporary Competitive Advantage Aver./Above Average Returns Sustainable Competitive Advantage Above Average Returns YES YES YES YES NO YES YES Value Chain Analysis Value chain analysis is a technique developed by Porter (1985) for understanding an organization’s value-adding activities and relationship between them. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Primary Activities Primary activities are those that directly contribute to production of good or services and organization’s provision to customer Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Primary Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Support Activities Support activities are those that aid primary activities, but do not themselves add value Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Firm Infrastructure Support Activities Human Resource Management Technological Development Procurement Primary Activities Financial Ratio Analysis • Five types of financial ratios – – – – – Short-term solvency or liquidity Long-term solvency measures Asset management (or turnover) Profitability Market value • Meaningful ratio analysis must include – Analysis of how ratios change over time – How ratios are interrelated Financial Ratio Analysis: Historical Comparisons Exhibit 3.8 Historical Trends: Return on Sales (ROS) for a Hypothetical Company Financial Ratio Analysis: Comparison with Industry Norms Financial Ratio Grocery Semiconductors Store Skilled-Nursing Facilities Quick Ratio (times) 1.5 0.5 1.1 Current ratio (times) 3.2 1.6 1.9 Total liabilities to net worth (%) 34.8 114.0 93.0 Collection period (days) 54.8 2.9 40.2 Assets to sales (%) 98.1 21.2 108.7 Return on sales (%) 3.1 0.9 2.0 Exhibit 3.9 How Financial Ratios Differ across Industries Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, 1999-2000, Desktop Edition, SIC #01008999 Financial Ratio Analysis: Comparison with Key Competitors Sales* ($ billions) R&D budget ($ billions) P&G Drug Division $ 0.8 $ 0.38 Bristol-Myers Squibb 20.2 1.80 Pfizer 27.4 4.00 Merck 32.7 2.10 Company (or division *Most recently completed fiscal year. Data: Lehman Brothers, Procter & Gamble Co. Source: R. Berner, “Procter & Gamble: Just Say No to Drugs,” Business Week, October 9, 2000, p. 128; data courtesy of Lehman Brothers and Procter & Gamble.
