Chapter 3

INTERNAL ANALYSIS

1
 Strategic model

Company Environ-
ment

Strategy
Internal analysis

2
 “Before leaders can set up a new
strategy, they must reach a common
understanding of the current position
of the company .”
- W. Chan.”Kim & Renee Mauborgne -

3
 Internal analysis

 The aim of the strategy is to generate better

business results (competitive advantage).

The purpose of internal analysis is to pinpoint the

strengths and weaknesses of the organization.

Strengths Weaknesses
Lead to superior performance. Lead to inferior performance

4
 Internal analysis

Internal analysis include assessment of:

❖Quantity and quality of the resources and

capabilities of an enterprise
❖The method of construction of unique
skills and distinctive capacity of
enterprises

5
 Competitive advantage
 Competitive advantage
Firm’s ability to gain profitability that is greater than
the average profitability of the industry.
 Sustainable Competitive advantage
 Ability to maintain profitability and good profit growth
that is higher than average level of the industry for
many years.

The main objective of the strategy is to

achieve a sustainable competitive advantage
which is measured by better profit and profit
growth rate.

6
 Profitability of the computer industry from1998 to 2003

Dell achieved sustainable competitive advantage, in comparison with competitors

Data Source: Value Line Investment Survey

7
Strategy, Resources, Capabilities, and Competencies

8
Evaluation of company resources

(Some) RESOURCES
+
(Some) CAPABILITY
➔
DISTINCTIVE
COMPETENCIES

9
Distinctive competencies and the role of
resources and capabilities

Resources
• Visible (physical) and invisible (non-physical)
• Allows a company to create value for customers
• Must have skills to utilize resources
• Owned and inimitable resources of the company as well as
valuable resources to create large demand for the company's
products form
distinctive competencies
shap
e
=
Capabilities
• Coordination and efficient use of resources
• Owned capacity to manage company resources
forming distinctive competencies

10
 Resources
Resources

• Visible resources: financial, physical, technological,

organizational resources.
• Invisible: human resource, innovation, reputation.
• Allows a company to create value for customers
• Must have skills to utilize resources
• Owned and inimitable resources of the company as
well as valuable resources to create large demand for
the company's products form distinctive
competencies

11
 Resources
Tangible Resources – Assets that can be seen, touched or quantified
Financial Resources  The firm’s borrowing capacity
 The firm’s ability to generate
internal funds
Organizational • A firm’s formal reporting structure
Resources & formal planning, controlling &
coordinating systems
• Sophistication & location of a
Physical Resources firm’s plant & equipment
• Access to raw materials
• Stock of technology, such as
Technological patents, trademarks,
Resources copyrights, & trade secrets

12
 Resources
Intangible Resources
Human Resources  Knowledge
 Trust
 Managerial capabilities
 Organizational routines
Innovation • Ideas
Resources • Scientific capabilities
• Capacity to Innovate
• Brand name
Reputation • Reputation with Customer and
Resources Suppliers
• Perceptions of product quality,
durability and reliability

13
 Capacities

Capacities
• Capacity for coordination and efficient use of
resources
• Usually based on the development, transfer, and
exchange of information and knowledge through
human resources in enterprises
• Capacity foundation is the knowledge and unique
skills of staff in companies -> professional skills of
labour.

14
 Capabilities
Functional Areas Capabilities Examples

• Supply Chain Dist. • Effective procurement techniques Starbucks

• Effective logistics mgmt. techniques Wal-Mart
• Human Res. Mgmt. • Motivate, empower, retain employees Royal Bank
• Info. Systems • Effective / efficient inventory control Wal-Mart
via point-of-purchase data collection
• Marketing • Effective promo of brand-name product GilIette
• Effective Customer Service McKinsey
• Management • Ability to envision the future of clothing Nordstrom
• Effective organizational structure Gap, Inc.
• Effective culture WestJet

15
 Capabilities
Functional Areas Capabilities Examples

• Manufacturing • Design & production skills yielding Komatsu

reliable products
• Product & design quality Gap, Inc.
• Production of technologically Mazda
sophisticated automobile engines
• Product & component miniaturization Sony

• Research and • Exceptional technological capability Corning

Development • Development of sophisticated Motion Control
elevator control solutions
• Rapid transformation of technology Nucor Steel
into new products and processes
• Knowledge of silver-halide materials Kodak

16
Distinctive capacity to achieve competitive advantage
Distinctive competencies
• Company’s specific strengths allows them to create
product differentiation and /or lower costs than
competitors in order to gain competitive advantage.
• Including 4 main factor: Value, Rarity, Imitability,
Organization (VRIO)

17
A distinctive competency is a capability that is:
Valuable Allows a firm to neutralize threats or exploit
opportunities in its external environment.
Rare Possessed by few, if any, current and
potential competitors.
Costly to When other firms either cannot obtain them
Imitate $ or must obtain them at a much higher cost.

Organized The firm must be organized appropriately to

to be obtain full benefits of the resources in order to
Exploited realize a competitive advantage.

*
18
 Competitive advantage, value creation and
profitability

Company profitability depends on three following basic

factors:

1. VALUE or UTILITY that customers get from

possession of products.
2. Product PRICE
3. COST to make products
 Consumer surplus is superior utility that
consumers gain exceeds the price they paid.

Basic principle: the higher the utility that consumers get

from the company product or services, the more pricing
options the company has
19
Value Creation per Unit

20
Value Creation and Pricing Options

21
Comparing Toyota and General Motors

Creation of superior value requires the gap between

the utility gained (U) and production costs (C) is
greater than the competitors.

22
 Value Differentiation
Now,
What’s
What’s
what’s
the
thebest
best
the best
deal
dealdeal
for
forthe
the
for
VALUE PRICE
thebusiness?
customer?
customer?
VALUE
PRICE
VALUE

COST COST
VALUE
PRICE

PRICE

COST COST

A B C D
23
 Value Chain Analysis
➢ Competitive advantage depends on the ability of the
organization to organize its resources and value-adding
activities in a way that is superior to its competitors.

➢ Value chain analysis is a technique developed by Porter

(1985) for understanding an organization’s value-adding
activities and relationship between them.

24
 The Value Chain
➢ The value chain is the chain of activities which
results in the final value of a business’s
products.
➢ Value added, or margin is indicated by sales
revenue minus costs.

➢ Porter divided internal parts of organization

into primary and support activities

25
 The Firm’s Value Chain
Support Activities

Firm Infrastructure
Human Resources Management
Technological Development
Procurement

Inbound Outbound Marketing

Operations Service
Logistics Logistics & Sales

Primary Activities

26
 Primary activities in the V-C
Primary activities are those that directly contribute to
production of good or services and organization’s provision
to customer
 Inbound Logistics: receiving, storing and distributing
inputs to the production part.
 Operations: transforming inputs into the final product
form
 Outbound Logistics: collecting, storing, and
distributing the product or service to buyers
 Marketing & Sales: purchases of products and
services by end users and the inducements used to get
them to make purchases
 Service: providing service to enhance or maintain the
value of the product

27
 Support activities in the V-C
Support activities are those that aid primary activities, but
do not themselves add value

 Firm infrastructure: Typically supports the entire value

chain and not individual activities
 Human Resources Management: involved in the
recruiting, hiring, training, development, and
compensation of all types of personnel
 Technology Development: Related to a wide range of
activities and those embodied in processes and
equipment and the product itself
 Procurement: purchasing inputs used in the firm’s value
chain

28
 Value chain analysis

 An organization can develop a competitive

advantage:
 in any of the primary or support activities OR
 in the way they are combined OR
 in the way internal activities are linked to the external
environment (with suppliers and forward channels)
 Functional Analysis
 How much value is produced by this area versus the cost of
producing that value?

29
 Value chains exist in all sectors

 Finally, don’t think that Value Chain analysis

applies only to manufacturing firms
 Organizations involved in Service, Consulting,
Higher Education, etc, all have their value chains
 But Primary & Support activities may be
different...

30
 The Value System
➢ The value chain of an individual organization provide
an incomplete picture of its ability to add value.
➢ Many value-adding activities are shared between
organizations often in the form of a collaborative
network.
➢ As organizations identify and concentrate on their core
competences and core activities, they increasingly
outsource activities to other business for whom such
activities are core.

31
➢ The value system is the chain of activities from supply of
resources through to final consumption of a product.
➢ The total value system, in addition to the organization’s
own value chain, can consists of upstream linkages with
suppliers and downstream linkages with distributions and
customers.
➢ The value system is a similar concept to that of the supply
chain and illustrates the interactions between an
organization, its suppliers, distribution channels and
customers.

32
 Distribution
Supplier Competitor Customers
channel

Distribution
Supplier Organization Customers
channel

Distribution
Supplier Competitor Customers
channel

The Value System

33
The roots of competitive advantage:

34
The Generic Building Blocks of
Competitive Advantage

35
 Efficiency
 The quantity of inputs it takes to produce a
given output. Usually measured as outputs
over inputs.
 No. of employees
 Capital investment
 Productivity leads to greater efficiency and
lower costs
 Employee productivity
 Capital productivity

36
 Quality
 Superior quality = customer perception of
greater value in a specific product’s
attributes
 Form, features, performance, durability,
reliability, style, design
 Quality products = goods and services that
are reliable and that are differentiated by
attributes that customers perceive to have
higher value

37
 Quality (cont’d)

 The impact of quality on competitive

advantage
 High-quality products increase the value of
(differentiate) the products in customers’ eyes
 Greater efficiency and lower unit costs are
associated with reliable products

38
A Quality Map for Automobiles

When customers
evaluate the quality of
products, they are often
measured by two
properties :
1. Outstanding
attributes
2. Reliability

39
 Innovation
 The act of creating new, commercially
viable products or processes
 Product innovation
 Creates products that customers perceive as
more valuable, increasing the company’s
pricing options
 Process innovation
 Creates value by lowering production costs
 Perhaps the most important building
block of competitive advantage

40
 Responsiveness to Customers
 Doing a better job than competitors
of identifying and satisfying
customers’ needs
 Superior quality and innovation are
integral to superior responsiveness to
customers
 Customizing goods and services to the
unique demands of individual
customers or customer groups

41
 Responsiveness to Customers (cont’d)
 Sources of enhanced customer
responsiveness
 Customer response time, design, service,
after-sales service and support
 Differentiates a company’s products;
leads to brand loyalty and premium
pricing

42
The Impact of Efficiency, Quality, Innovation, and Customer
Responsiveness on Unit Costs and Prices

43
 The Resource-Based model of Above Average Returns

 Capabilities evolve and must be managed

dynamically in pursuit of above-average returns.
 Firms acquire different resources and develop
unique capabilities. These resources may not be
mobile across firms and that the differences in
resources are the basis of competitive advantage.

44
The Resource-Based model of Above Average Returns

The resource based view suggests that a

firm’s unique resources and capabilities
provide the basis for a strategy.

45
 RBV
 Resource based view has four key
assumptions:
 Resources and/or capabilities are: Valuable,
Rare, Inimitable, Nonsubstitutable
 The firm is organized to exploit the resources
and capabilities.
 Key focus is internal.

46
 Resources and capabilities
Resources can be
either observable
and tradable or
unobservable (tacit)

V E
E

T A

T N
E A
I

I
and harder to trade:
Resources

T
represent an asset
that contributes to a Should deliver
firm’s market customers a greater Superior
position by value proposition Economic
increasing value or Contribution
lowering cost
Should help build
CAPABILITIES
Barriers to entry either
More likely to be by raising the actual Sustainable
unobservable & costs of physical plant Market
difficult to trade or increasing brand Position
The ability of a firm to loyalty among
accomplish tasks that customers
are linked to higher
economic performance
by increasing value,
decreasing cost or
both

47
The Resource-Based Model of
Superior Returns Action required:
Identify firm resources.
Study strengths &
Resources weaknesses relative to rivals.
Inputs to a firm’s
production process.

*
an

48
The Resource-Based Model of
Superior Returns Action required:
Determine what firm
capabilities allow it to do
Resources better than rivals.
Capability
Inputs to a firm’s
Capacity
production for integrated set
process.
of resources to integratively
perform a task or
activity.

*
an

49
The Resource-Based Model of
Superior Returns Action required:
Determine how firm’s
resources & capabilities
Resources may create competitive
Capability advantage.
Inputs to a firm’s Competitive
Capacity
production for
process. an integrated
Advantage
set of resources to
integratively perform
Ability a to
of a firm
task or activity.
outperform its rivals

an *
50
The Resource-Based Model of
Superior Returns Action required:
Locate an attractive
industry.
Resources
Capability
Competitive
Inputs to a firm’s
Capacity
production Advantage
for
process. An Attractive
an integrated
set of resources to Industry
Ability
integratively of a firm
perform a to
outperformLocation
task or activity. its rivalsof an industry
with opportunities that
can be exploited by firm’s
resources & capabilities

*
an

51
The Resource-Based Model of
Superior Returns Action required:
Select strategy that best
exploits res.& capabilities
Resources relative to opportunities in
Capability environments.
Competitive
Inputs to a firm’s
Capacity
production Advantage
for
process. An Attractive
an integrated
set of resources to IndustryStrategy
integrativelyAbility of aafirm to
perform
outperform Location
its rivals
Formulation
of an ind. and
task or activity.
Implementation
with opportunities that
can be exploited by
Strategic
firm’s resources & actions taken to
earn above-average
capabilities
returns

*
an

52
The Resource-Based Model of
Superior Returns Action required:
Maintain selected strat. in
order to outperform
Resources industry rivals.
Capability
Competitive
Inputs to a firm’s
Capacity
production Advantage
for
process. An Attractive
an integrated
set of resources to IndustryStrategy
integrativelyAbility of aafirm to
perform
Location Formulation
of an ind. and
Superior
outperform
task or activity. its rivals
Implementation
with opportunities that
Returns
can be exploited by
Strategic Earning
actions of above-
taken to
firm’s resources &
earn average returns
above-average
capabilities
returns

*
an

53
“Development of a strong and
healthy organization requires
understanding the environment as
well as the organization.”

- Gary Hamel

54