I NTERNAL A NALYSIS STRATEGIC MANAGEMENT ผศ. ดร. พิพัฒน์ นนทนาธรณ์ [email protected]

INTERNAL ANALYSIS

STRATEGIC MANAGEMENT

ผศ.ดร.พิ�พิ�ฒน์ น์น์ทน์าธรณ์[email protected]

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

EXTERNAL ANALYSES’ OUTCOMES

OpportunitieOpportunities and s and threatsthreats

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INTERNAL ANALYSES’ OUTCOMES

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

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

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THE CONTEXT OF INTERNAL ANALYSIS

Global Economy Traditional sources of advantages can be overcome

by competitors’ international strategies and by the flow of resources throughout the global economy.

Global Mind-Set The ability to study an internal environment in

ways that are not dependent on the assumptions of a single country, culture, or context.

Analysis Outcome Understanding how to leverage the firm’s bundle of

heterogeneous resources and capabilities.

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CHALLENGE OF INTERNAL ANALYSIS

Identifying, developing, protecting, and deploying resources, capabilities, and core competencies

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Resource-Based Approach to Organizational Analysis

Steps for Strategy Analysis --

1. Identify firms strengths and weakness by:– Identify and classify resources– Combine/Integrate resources into capabilities

2. Combine firm’s strengths into specific core competencies / Distinctive Competencies

3. Appraise profit potential of resources / capabilities (Competencies) to sustain competitive advantage

4. Select strategy that best exploits your competencies (Resources and Capabilities)

5. Identify resource gaps invest in weaknesses

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Why within a given industry, some companies do better then the others?

Internal strategic factors --

–Critical strengths and weaknesses that are likely to determine if the firm will be able to take advantage of opportunities while avoiding threats

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RETURN ON CAPITAL EMPLOYED FOR SELECTED U.S. DEPARTMENT STORES, 1989-1998

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WHY DO COMPANIES FAIL?

What went wrong? Inertia Prior strategic

commitments The Icarus paradox

Avoiding failure and sustaining competitive advantage: Focus on the building

blocks of competitive advantage.

Institute continuous improvement and learning.

Track best industrial practice and use benchmarking.

Overcome inertia.

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COMPETITIVE ADVANTAGE: VALUE CREATION, LOW COST, AND DIFFERENTIATION

Competitive advantage is a firm’s ability to outperform its competitors (earn higher profits).

The source of competitive advantage is value creation for customers.

Sustained competitive advantage comes from maintaining higher profits than competitors over long periods of time.

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VALUE CREATION

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GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE

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THE IMPACT OF QUALITY ON PROFITS

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THE IMPACT OF EFFICIENCY, QUALITY, INNOVATION, AND CUSTOMER RESPONSIVENESS ON UNIT COSTS AND PRICES

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DISTINCTIVE COMPETENCIES, RESOURCES, AND CAPABILITIES

The roots of competitive advantage:

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STRATEGY AND COMPETITIVE ADVANTAGE

The relationship between strategies and resources and capabilities:

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THE DURABILITY OF COMPETITIVE ADVANTAGE

Barriers to imitationSpeed of imitation by competitors in

reducing advantage Imitation by acquiring similar resources Imitation of capabilities (more difficult)

Limits on competitorsPrior strategic commitmentsAbsorptive capacity for change

Industry dynamismThe rapid innovation

shortens product life cycles.

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STRENGTHS AND WEAKNESSES

Goal: objective assessment of your strengths and weaknessesrelative to competitors important to customers

Note: This is difficult to do well.

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•Resources: Assets, process, knowledge, or competency controlled by corporation

–Tangible: Land & Plant –Intangible: Human Capital & Reputation

•Distinctive competency: These are Core Competencies that are superior of those of competitors. What you do better then your competitors?

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STRATEGIC RESOURCES AND CAPABILITIES

TangibleLandBuildingsPlant Equipment

IntangibleBrand namesReputationPatentsTechnological or

marketing know-how

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RESOURCES

Inputs into a firm’s production process such as capital equipment, skill of individual employees, patents, finance, and talented managersTangible Resources – Assets that can be seen

and quantified Intangible Resources – Family commitment,

networks, organizational culture, reputation, intellectual property rights, trademarks, copyrights

By themselves, resources do not create a strategic advantage for the firm. 21

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CAPABILITIES

Capacity to deploy resources that have been purposely integrated to achieve a desired end state.

Primary base for the firm’s capabilities is the skills and knowledge of its employees.

Just because the firm has a strong capacity for deploying resources does not mean it has a competitive advantage.

• Capabilities: Integrated Resources / Skills in Integrated Resources / Skills in effectively coordinating and managing resources effectively coordinating and managing resources for productive usefor productive use– Normally Intangible (i.e. Customer Service Capability

& R&D Capability) 22

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CORE COMPETENCIES

Resources and capabilities serve as a source of competitive advantage for a firm over its rival.

Not all resources and capabilities are core competencies.

Many suggest that firms should identify and concentrate on only 3 or 4 core competencies.

Core competency: Are unique resources and capabilities (STRENGTHS) combined into specific activities a firm can perform extremely well

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Continuum of SustainabilitySustainability of Competitive Advantage

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Sustainability of Competitive Advantage

Durability -- Rate at which a firm’s underlying resources and capabilities depreciate or become obsolete

Imitability -- Rate at which a firm’s underlying resources and capabilities can be duplicated by others

–Core Competency can be imitated to the extent that it is transparent, transferable, and replicable

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Core and Distinctive CompetenciesVRIO Framework – Four questions to evaluate firm’s key resources and capabilities (Barney)

–Value: Does it provide customer value and competitive advantage?

–Rareness: Do other competitor possess it?

–Imitability: Is it costly for other to imitate?

–Organization: Is the firm organized to exploit the resource/capability? 26

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COMPONENTS OF INTERNAL ANALYSIS LEADING TO COMPETITIVE ADVANTAGE AND STRATEGIC COMPETITIVENESS

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CREATING VALUE

By exploiting their core competencies or competitive advantages, firms create value.

Value is measured by: Product performance characteristics

Product attributes for which customers are willing to pay

Firms create value by innovatively bundling and leveraging their resources and capabilities.

Superior value Above-average returns

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CREATING COMPETITIVE ADVANTAGE

Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage.

Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies.

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THE CHALLENGE OF INTERNAL ANALYSIS

Strategic decisions in terms of the firm’s resources, capabilities, and core competencies: Are non-routine.

Have ethical implications.

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

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THE CHALLENGE OF INTERNAL ANALYSIS (CONT’D)

To develop and use core competencies, managers must have: Courage

Self-confidence

Integrity

The capacity to deal with uncertainty and complexity

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

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CONDITIONS AFFECTING MANAGERIAL DECISIONS ABOUT RESOURCES, CAPABILITIES, AND CORE COMPETENCIES

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RESOURCES, CAPABILITIES AND CORE COMPETENCIES

Resources Are the source of a firm’s

capabilities. Are broad in scope. Cover a spectrum of

individual, social and organizational phenomena.

Alone, do not yield a competitive advantage.

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources•TangibleTangible•IntangibleIntangible

CapabilitiesCapabilities

CoreCoreCompetenciesCompetencies

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RESOURCES Resources

Are a firm’s assets, including people and the value of its brand name.

Represent inputs into a firm’s production process, such as: Capital equipment Skills of employees Brand names Financial resources Talented managers

Types of Resources Tangible resources

Financial resources Physical resources Technological resources Organizational

resources

Intangible resources Human resources Innovation resources Reputation resources

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TANGIBLE RESOURCES

Financial Resources • The firm’s borrowing capacity• The firm’s ability to generate internal funds

Organizational Resources •The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems

Physical Resources •Sophistication and location of a firm’s plant and equipment•Access to raw materials

Technological Resources •Stock of technology, such as patents, trademarks, copyrights, and trade secrets

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INTANGIBLE RESOURCES

Human Resources • Knowledge

• Trust• Managerial capabilities•Organizational routines

Innovation Resources • Ideas• Scientific capabilities• Capacity to innovate

Reputational Resources • Reputation with customers• Brand name• Perceptions of product quality, durability, and reliability• Reputation with suppliers• For efficient, effective, supportive, and mutually beneficial interactions and relationships

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Capabilities Represent the capacity to

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

Emerge over time through complex interactions among tangible and intangible resources

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





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Capabilities (cont’d) The foundation of many

capabilities lies in: The unique skills and

knowledge of a firm’s employees

The functional expertise of those employees

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





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EXAMPLES OF FIRMS’ CAPABILITIES

Functional Areas CapabilitiesDistribution Effective use of logistics management techniquesHuman resources Motivating, empowering, and retaining employeesManagement Effective and efficient control of inventories throughinformation systems point-of-purchase data collection methodsMarketing Effective promotion of brand-name products

Effective customer serviceInnovative merchandising

Management Ability to envision the future of clothingEffective organizational structure

Manufacturing Design and production skills yielding reliable productsProduct and design qualityMiniaturization of components and products

Research & Innovative technologydevelopment Development of sophisticated elevator control solutions

Rapid transformation of technology into new products and processesDigital technology

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Four criteria for determining strategic capabilities: Value

Rarity

Costly-to-imitate

Nonsubstitutability





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Core Competencies Resources and capabilities

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

Distinguish a company competitively and reflect its personality.

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





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Core Competencies Activities that a firm performs

especially well compared to competitors.

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





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BUILDING CORE COMPETENCIES

Four Criteria of Sustainable Competitive Advantage Valuable capabilities

Rare capabilities

Costly to imitate

Nonsubstituable


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

Four Criteria of Four Criteria of Sustainable Sustainable AdvantagesAdvantages

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THE FOUR CRITERIA OF SUSTAINABLE COMPETITIVE ADVANTAGE

Valuable Capabilities •Help a firm neutralize threats or exploit opportunities

Rare Capabilities •Are not possessed by many others

Costly-to-Imitate Capabilities •

Historical: A unique and a valuable organizational culture or brand name

•Ambiguous cause: The causes and uses of a competence are unclear

•Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Nonsubstitutable Capabilities •

No strategic equivalent

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BUILDING SUSTAINABLE COMPETITIVE ADVANTAGE

Valuable capabilities Help a firm neutralize

threats or exploit opportunities.

Rare capabilities Are not possessed by

many others.




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Costly-to-Imitate Capabilities Historical

A unique and a valuable organizational culture or brand name

Ambiguous cause The causes and uses of a

competence are unclear Social complexity

Interpersonal relationships, trust, and friendship among managers, suppliers, and customers


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


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Nonsubstitutable Capabilities No strategic equivalent

Firm-specific knowledge Organizational culture Superior execution of the

chosen business model




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IDENTIFYING AND BUILDING CORE COMPETENCIES

Core competencies must be distinctive.Capabilities that are done better than

competitorsIdentifying core competencies is key

to development of sound strategy.We use the value chain to help

identify core competencies.

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Value-Chain AnalysisIt is the linked set of value-creating activities

beginning with basic raw material and ending with distributors getting final goods into hands of customers

– A simple way to examine traditional functional areas and the activities used to implement business level strategy

Managers must examine each product line’s value chain to understand:

1. Its core competencies and / or core deficiencies

2. The connection between way activity is performed and the cost of performance

3. The potential synergies between different product lines (Economies of Scope)

4. How activities create value to customers

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Value-Chain Analysis

Typical Value Chain for a Manufactured

Product

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Corporation’s Value Chain

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THE VALUE CHAIN

A framework for identifying core competencies Inside the firm In the supply chain

Can be used to Identify strengths and weaknesses Identify sources of competitive advantage Identify market opportunities

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PRIMARY ACTIVITIES IN THE VALUE CHAIN

Inbound Logistics Materials handling, warehousing, inventory control used to

receive, store and disseminate inputs to a product Fertilizer and chemical storage, delivery of inputs, application of

inputs Operations

Take inputs from inbound logistics and convert to final products Plowing, planting, spraying, harvesting, feeding, medicating,

weighing,etc. Outbound Logistics

Collecting, Storing, and physical distribution of the final product. Crop storage, finished hog handling, Processing and determining

delivery dates, delivery to the packer or elevator etc.

Inbound Logistics

Marketing and Sales

Outbound Logistics

Operations

Technology

Human Resource management

Procurement

Firm Infrastructure

Service

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PRIMARY ACTIVITIES IN THE VALUE CHAIN

Marketing and Sales Provide means through which customers can purchase

products and to induce them to do so Advertising, communicating with buyers, developing

customer relationships, pricing products (futures, hedging, forward contracting, etc.), delivery scheduling

Service Activities designed to enhance or maintain a product’s

value Timely delivery, identity preservation, ISO9000,

certifying as organic, etc.

Inbound Logistics

Marketing and Sales

Outbound Logistics

OperationsService


Firm Infrastructure

Human Resources

Procurement

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SUPPORTING ACTIVITIES IN THE VALUE CHAIN

Procurement Activities to purchase the inputs needed to produce products Negotiating with suppliers, standard timing of replenishing

parts and tools, setting up buying groups, etc.

Technological Development Activities that improve the firm’s products and/or processes Volunteering for test plots, being a part of feeding trials,

attending technology seminars/field days, designing equipment to make specific production tasks more efficient, etc.

Human Resources Recruiting, hiring, training, developing, and compensating all

personnel

Inbound Logistics

Marketing and Sales

Outbound Logistics

Operations

Human Resources

Technological Development

Procurement

Service

Firm Infrastructure

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SUPPORTING ACTIVITIES IN THE VALUE CHAIN

Firm Infrastructure General Management, planning, finance, accounting,

legal support, governmental relations, etc. Establishment of accounting practices, management

information systems, compliance with environmental regulations, tracking and reporting for government programs, etc.

Where strategy development takes place identifying opportunities and threats, resources and capabilities, and support of core competencies

Inbound Logistics

Marketing and Sales

Outbound Logistics

Operations


Firm Infrastructure

Service

Technology

Procurement

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THE RESULT OF THE VALUE CHAIN

MarginsCapture the value from performing value-

creating activities as cheaply as possibleThe basic idea is that the consumer is willing to

pay a certain amount for the value you create. This is depicted as the size of the overall pentagon.

The size of the individual activity boxes represents the cost of performing those particular activities.

Thus, the smaller the size of the individual activity boxes relative to the value the consumer is willing to pay, the greater the MARGIN will be for the firm. 57

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VALUE CHAIN ANALYSIS

A firm’s value chain must be compared to competitors’ value chains to determine where competitive advantages exist.

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

to competitor’s performancesPerform a value-creating activity that

competitors cannot complete

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LINKAGES WITHIN THE VALUE CHAIN

Optimization and coordination of activities in the value chain

Linkages exist between support activities and primary activities and between separate primary activities

Generic causes for linkages Same function can be performed in different ways Efforts in indirect activities Activities performed inside the firm reduce the

need for activities in the field Quality Assurance can be performed in different

ways

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VALUE CHAIN LINKAGES IN THE SUPPLY CHAIN

Supplier Chain

Firm Chain

Buyer Chain

Supplier Chain

Buyer Chain

Buyer Chain

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LINKAGES WITH SUPPLIER VALUE CHAIN

Linkages between suppliers’ value chains and a firms chain provide opportunities for the firm to enhance competitive advantage.

Division of benefits between firm and its suppliers is a function of supplier’s bargaining power and reflecting in supplier’s margins.

Both coordination with suppliers and hard bargaining are important to competitive advantage.

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THE BUYER’S VALUE CHAIN

A firm’s differentiation stems from how its value chain relates to its buyer’s chain.

Differentiation derives fundamentally from creating value for the buyer through a firm’s impact on the buyer’s value chain.

Value is created when a firm creates a competitive advantage for its buyer.

The buyer must perceive the value to pay a premium price.

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OUTSOURCING

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

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

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

can create value. Specialty suppliers can perform outsourced

capabilities more efficiently.

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STRATEGIC RATIONALES FOR OUTSOURCING

Improving business focus Helps a company focus on broader business issues

by having outside experts handle various operational details.

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

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

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STRATEGIC RATIONALES FOR OUTSOURCING (CONT’D)

Accelerating re-engineering benefits Achieves re-engineering benefits more quickly by

having outsiders—who have already achieved world-class standards—take over process.

Sharing risks Reduces investment requirements and makes firm

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

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

those that serve customers more effectively.

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OUTSOURCING ISSUES Seeking greatest value

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

Evaluating resources and capabilitiesDo not outsource activities in which the firm

itself can create and capture value. Environmental threats and ongoing tasks

Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks.

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OUTSOURCING ISSUES (CONT’D)

Nonstrategic team resources

Do not outsource capabilities critical to the firm’s 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.

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INTERNAL ANALYSIS: FUNCTIONAL AREAS

Marketing HRM Finance R&D ICT …

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Functional Area –

Strategic Marketing Issues

–Market Position & Segmentation–Marketing Mix–Product Life Cycle–Brand & Corporate Reputation

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Product Life Cycle

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Functional Area

Strategic Financial Issues

–Financial leverage

–Capital budgeting

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Functional Area –

Strategic Research & Development Issues

–R&D Intensity

–Technological Competence

–Technology Transfer

–Technological Discontinuity

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Functional Area –

Strategic Human Resource Management IssuesHRM –

–Increasing use of teams–Union relations –Temporary workers–Quality of work life–Human diversity

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OUTCOMES FROM COMBINATIONS OF THE FOUR CRITERIA

Valua

ble?

Rare?

Costly

to

Imita

te?

Non

subs

titut

abl

e?

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

74

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OUTCOMES FROM COMBINATIONS OF THE CRITERIA FOR SUSTAINABLE COMPETITIVE ADVANTAGE

75

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IFE– Gateway Computers (2003)

Key Internal Factors Weight

RatingWtd

Score

Strengths1. Several new senior executive with world-class skills and leadership experience

0.05 4 0.40

2. Continuous decline in operating costs and cost of goods sold

0.05 3 0.15

3. Well-known brand name 0.05 3 0.15

4. Consumer Reports (Sept 2002) recommended Gateway 500X as #1

0.10 4 0.40

5. As a direct seller, Gateway holds high brand recognition

0.05 3 0.1576

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RatingWtd

Score

Strengths (cont’d)6. Gateway is diversifying into non-PC products

0.10 3 0.30

7. Good relationship with its suppliers. 0.05 4 0.20

8. Economies of scale, the 6th largest PC maker I the world

0.05 4 0.20

9. Gateway retails stores excellent 0.05 3 0.15

77

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RatingWtd

Score

Weaknesses1. High operating expense (22% of revenue vs. 10% for Dell)

0.05 3 0.15

2. Almost no budget for R&D vs. Dell’s 18% of revenue

0.10 1 0.05

3. Low return on assets ratio 0.025 1 0.10

4. No niche market 0.025 2 0.05

78

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RatingWtd

Score

Weaknesses (cont’d)5. Shortage of cash due to successive losses

0.10 2 0.20

6. Limited number Gateway stores 0.05 2 0.10

7. Weak performance in overseas market

0.10 2 0.20

TOTAL 1.00 2.8579

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5-80

Internal Factor Analysis Summary (IFAS):Maytag as Example

Internal Factors Weight Rating

Weighted Score Comments

1 2 3 4 5

1.00

Strengths• Quality Maytag culture• Experienced top management• Vertical integration• Employee relations• Hoover’s international

orientation

Weaknesses• Process-oriented R&D• Distribution channels

• Financial position• Global positioning

• Manufacturing facilities

Total Weighted Score

Quality key to successKnow appliancesDedicated factoriesGood, but

deterioratingHoover name in

cleaners

Slow on new productsSuperstores replacing

small dealersHigh debt loadHoover weak outside

the United Kingdom and Australia

Investing now3.05

.15

.05

.10

.05

.15

.05

.05

.15

.20

.05

54433

22

22

4

.75

.20

.40

.15

.45

.10

.10

.30

.40

.20

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Documents

I NTERNAL A NALYSIS STRATEGIC MANAGEMENT ผศ. ดร. พิพัฒน์ นนทนาธรณ์ [email protected]