INTERNAL ANALYSIS
Payne
(4)
1
Components of Internal Analysis
Value Creation
Core
Competencies
Discovering Core
Competencies
Competitive
Advantage
Capabilities
Four Criteria
of Sustainable
Advantages
Resources
• Tangible
• Intangible
•
•
•
•
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Value
Chain
Analysis
• Outsource
2
The Links between Resources, Capabilities
and Competitive Advantage
COMPETITIVE
ADVANTAGE
INDUSTRY KEY
SUCCESS FACTORS
STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES
TANGIBLE
INTANGIBLE
•Financial
•Physical
•Technology
•Reputation
•Culture
HUMAN
•Skills/know-how
•Capacity for
communication
& collaboration
•Motivation
3
Strengths / Weaknesses / Opportunities / Threats


SWOT
Use Value Chain Analysis
 Strengths
and Resource Analysis
 Weaknesses
 Opportunities
Build from Industry and
Competitive Analysis
 Threats
Strategy-making must be well-matched to both:
 A firm’s resource strengths and weaknesses
 A firm’s best market opportunities and
external threats to its well-being
4
SWOT Analysis -- Examples
Potential Resource
Strengths
Potential Resource
Weaknesses
Potential Company
Opportunities
Potential External
Threats
• Core competencies in
key areas
• Adequate financial
resources
• Strong brand name
image/reputation
• An acknowledged
market leader
• Access to economies
of scale
• Cost advantages
• Better advertising
campaigns
• Product innovation
skills
• Proven management
• Superior technologies
• Others
• No clear strategic
direction
• Obsolete facilities
• Excess debt
• Lack of managerial
depth and talent
• Missing key
skills/competencies
• Internal operating
problems
• Poor implementation
capabilities
• Weak distribution
network
• Too narrow product
line
• Weak marketing
skills
• Expanding customer
groups
• Expanding
geographic areas
• Expanding product
needs from key
customer groups
• Available firms for
purchase or alliance
due to economic
changes
• Falling trade barriers
in attractive foreign
markets
• Changes in legal /
regulatory demands
• Complacency among
rival groups
• Development of new
technologies
• Entry of new
competitors
• Rising viability of
substitutes
• Slowing market
growth
• Adverse shifts in
exchange rates and
trade policies
• Costly new
regulations and legal
requirements
• Economic recessions
or negative business
cycles
• Growing leverage of
customers or suppliers
• Changing buyer
needs / trends
• Demographic changes
5
Appraising Resources
RESOURCE
CHARACTERISTICS
Financial
Tangible
Resources
Debt/ Equity ratio
Credit rating
Net cash flow
Physical
Technology
Intangible
Resources
Reputation
Human
Resources
Borrowing capacity
Internal funds generation
INDICATORS
Plant and equipment:
size, location, technology
flexibility.
Land and buildings.
Raw materials.
Market value of
fixed assets.
Scale of plants
Alternative uses for
fixed assets
Patents, copyrights, know how
R&D facilities.
No. of patents owned
Royalty income
Technical and scientific
R&D expenditure
employees
R&D staff
Brands. Customer loyalty. Company
reputation (with suppliers, customers,
government)
Brand equity
Customer retention
Supplier loyalty
Training, experience, adaptability,
Employee qualifications,
commitment and loyalty of employees
pay rates, turnover.
6
The World’s Most Valuable Brands, 2003
Rank Company
Brand
value
($bn.)
Rank
1
2
3
4
5
6
7
8
9
10
70.45
65.17
51.76
42.34
31.11
29.44
28.03
24.69
22.18
21.31
11
12
13
14
15
16
17
18
19
20
Coca-Cola
Microsoft
IBM
GE
Intel
Nokia
Disney
McDonald’s
Marlboro
Mercedes
Company
Brand
value
($bn.)
Toyota
20.78
Hewlett-Packard 19.86
Citibank
18.57
Ford
17.07
American Express 16.29
Gillette
15.98
Cisco
15.57
Honda
15.63
BMW
15.11
Sony
13.15
Source: Interbrand
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Organization Capabilities
• Capabilities are what a firm does, and represent the firm’s capacity
to deploy resources that have been purposely integrated to achieve
a desired end state.
• Firm competences or skills the firm employs to transfer inputs
to outputs
• Capacity to combine tangible and intangible resources, using
organizational processes to attain desired end.
• The purposeful coordination of resources and competencies.
Examples:
•Outstanding customer service
•Excellent product development capabilities
•Innovativeness of products and services
•Ability to hire, motivate, and retain human capital
8
Appraising the Capabilities of a
Business School
Superfluous
strengths
Relative Strength
Superior
Key strengths
6
9
3
5
Parity
2
Inconsequential
weaknesses
8
4
12
11
Deficient
Not
important
10
7
Importance
1
Key:
1 Alumni relations
2 Student placement
3 Teaching
4 Administration
5 Course devlpmnt
6 Student recruitment
7 Research
8 Corporate relations
9 Marketing
10 IT
11 PR
12 HRM
Key weaknesses
Critically
important
9
Approaches to Capability Development

Mergers and Acquisitions



Strategic Alliances




Using separate units can protect the new venture from incompatibilities with
existing structures, management systems, and behavioral norms.
Yet, the new venture still has access to existing resources.
Product Sequencing


More targeted and cost effective.
Includes joint research, technology-sharing, joint marketing, etc
Incubating Capabilities


Fast, but expensive and sometimes risky.
Microsoft: eShop (1997), Hotmail (1998), NetGames (2000), etc.
Allows for an incremental and indirect approach to capability development by
driving product development. (e.g., 3M or Hyundai)
Managing the Process


Commitment to ambitious performance goals can create a driving force for
capability development.
See strategic intent, resource leverage and stretch (Prahalad & Hamel, 1996).
10
A Framework for Analyzing Resources and Capabilities
4. Develop strategy implications:
(a) In relation to strengths
- How can these be exploited more effectively?
(b) In relation to weaknesses
- Identify opportunities to outsourcing activities that
can be better performed by other organizations.
- How can weaknesses be corrected through acquiring
and developing resources and capabilities?
STRATEGY
POTENTIAL FOR
3. Appraise the firm’s resources and capabilities
in terms of:
(a) strategic importance
(b) relative strength
SUSTAINABLE
COMPETITIVE
ADVANTAGE
2. Explore the linkages between resources and
capabilities
CAPABILITIES
1. Identify the firm’s resources and capabilities
RESOURCES
11
Competencies vs. Core Competencies vs.
Distinctive Competencies

A competence is an internal activity that a company
performs better than other internal activities.

A core competence is a well-performed internal
activity that is central, not peripheral, to a
company’s strategy, competitiveness, and
profitability.

A distinctive competence is a competitively valuable
activity that a company performs better than its
rivals.
12
Assessing Sustainability of Resources and
Capabilities: Four Criteria
Is the resource or capability . . .
Implications
Valuable
• Neutralize threats and exploit
opportunities
Rare
Difficult to imitate
• Not many firms possess
Difficult to substitute
• No equivalent strategic resources
or capabilities
• Physically unique
• Path dependency (how
accumulated over time)
• Causal ambiguity (difficult to
disentangle what it is or how it
could be recreated)
• Social complexity (trust,
interpersonal relationships,
culture, reputation)
13
Criteria for Sustainable Competitive
Advantage and Strategic Implications
Is a Resource…
Valuable Rare
Difficult Without
to Imitate Substitutes
Implications
for Competitiveness
No
No
No
No
Competitive disadvantage
Yes
No
No
No
Competitive parity
Yes
Yes
No
No
Temporary competitive advantage
Yes
Yes
Yes
Yes
Sustainable competitive advantage
14
Why Rival Companies
Have Different Costs

Companies do not have the same costs because of
differences in:
 Prices paid for raw materials, component parts,
energy, and other supplier resources
 Basic technology and age of plant & equipment
 Economies of scale and experience curve effects
 Wage rates and productivity levels
 Marketing, promotion, and administration costs
 Inbound and outbound shipping costs
 Forward channel distribution costs
15
What Determines Whether a Company Is
Cost Competitive?


A company’s cost competitiveness depends on
how well it manages its value chain relative to
competitors
Three areas contribute to cost differences
1. Suppliers’ activities
2. The company’s own internal activities
3. Forward channel activities
Activities,
Costs, &
Margins of
Suppliers
Internally
Performed
Activities,
Costs, &
Margins
Activities, Costs,
& Margins of
Forward Channel
Allies & Strategic
Partners
Buyer/User
Value
Chains
16
The Value Chain Concept

Identifies the separate activities and business
processes performed to design, produce,
market, deliver, and support a product /
service – it can lead to cost efficiencies or
competency development.

Consists of two types of activities

Primary activities

Support activities
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Service
Marketing & Sales
Procurement
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Support Activities
The Basic
Value Chain
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
18
Primary activities of the
VALUE CHAIN

Inbound Logistics



Operations



Production
Layout
control systems
& work-flow design
Efficiency of finished goods delivery
Marketing and Sales



Productivity of equipment
Production processes
Outbound Logistics


Soundness of material and inventory handling
Efficiency of warehousing activities
Effective market research
Innovative sales promotion
Sales
force
Image,
brand loyalty
Service


Customer feedback mechanisms
Customer education and training
Warranty,
guarantee, repair
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
Support activities of the
VALUE CHAIN
Infrastructure



Technology Development





Physical: Size, location, age, flexibility of facilities and equipment
Financial: Risk, cost and use of funds, ability to raise capital
Research and development
Interaction with other departments
Technology transfer
Encourage innovation
Procurement

Obtain raw materials




acceptable quality
lowest cost
Supplier relationships
Human Resources


Knowledge: Types, levels of knowledge possessed by
employees throughout the firm
Skills: Various categories of skills and abilities developed
over time
20
From Value Chain Analysis
to Competitive Advantage

A company can create competitive advantage by managing its
value chain so as to
 Integrate the knowledge and skills of employees in
competitively valuable ways
 Leverage economies of learning / experience
 Coordinate related activities in ways that build valuable
capabilities
 Build dominating expertise in a value chain activity
critical to customer satisfaction or market success
The strategy-making lesson of value chain analysis:
Sustainable competitive advantage can be created by
(1) managing value chain activities better than rivals, and
(2) developing distinctive capabilities to serve customers!
21
Service
Procurement
Technological Development
Human Resource Mgmt.
Usually this is
because the specialty
supplier can provide
these functions more
efficiently
Firm Infrastructure
Outsourcing is the
purchase of some or
all of a valuecreating activity
from an external
supplier
Support Activities
Outsourcing
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
22
Strategic Rationales for Outsourcing

Improve Business Focus


Provide Access to World-Class Capabilities


Achieves re-engineering benefits more quickly by having outsiders-who have already achieved world-class standards--take over process
Share Risks


The specialized resources of outsourcing providers makes worldclass capabilities available to firms in a wide range of applications
Accelerate Business Re-Engineering Benefits


Lets company focus on broader business issues by having outside experts
handle various operational details
Reduces investment requirements and makes firm more flexible,
dynamic and better able to adapt to changing opportunities
Free Resources for Other Purposes

Permits firm to redirect efforts from non-core activities toward those
that serve customers more effectively
23
Outsourcing Issues

Greatest Value


Evaluating Resources and Capabilities


Do not outsource primary and support activities that are used to
neutralize environmental threats or complete necessary ongoing
organizational tasks
Non-strategic Team of Resources


Do not outsource activities in which the firm itself can create and
capture value
Environmental Threats and Ongoing Tasks


Outsource only to firms possessing a core competence in terms of
performing the primary or support activity being outsourced
Do not outsource capabilities that are critical to their success, even
though the capabilities are not actual sources of competitive
advantage
Firm’s Knowledge Base

Do not outsource activities that stimulate the development of new
capabilities and competencies
24