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Internal Analysis for Competitive Advantage

This document discusses internal analysis, which involves identifying a company's strengths and weaknesses. It is done through three steps: understanding how companies create value and profit, the importance of efficiency, innovation, quality and customer responsiveness, and analyzing sources of competitive advantage. Key issues are what influences the durability of advantage, why successful companies lose advantage, and how to avoid failure and sustain advantage. It also introduces blue ocean thinking, which finds new market spaces with minimal competition compared to red oceans with intense rivalry. A strategy canvas compares competitors on critical success factors to develop strategies creating new market spaces through value innovation.

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23 views4 pages

Internal Analysis for Competitive Advantage

This document discusses internal analysis, which involves identifying a company's strengths and weaknesses. It is done through three steps: understanding how companies create value and profit, the importance of efficiency, innovation, quality and customer responsiveness, and analyzing sources of competitive advantage. Key issues are what influences the durability of advantage, why successful companies lose advantage, and how to avoid failure and sustain advantage. It also introduces blue ocean thinking, which finds new market spaces with minimal competition compared to red oceans with intense rivalry. A strategy canvas compares competitors on critical success factors to develop strategies creating new market spaces through value innovation.

Uploaded by

joydipindrani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

MODULE 1

UNIT 3: Internal Analysis


 Critical Success Factors,
 The Strategic Importance of Resources,
 Competencies and Core Competencies,
 Value Chain, Building Blocks of Competitive Advantage,
 Durability of Competitive Advantage,
 Avoiding Failures and Sustaining Competitive Advantage,
 The Role of Luck,
 Robustness,
 Benchmarking

1. Please join my classroom (click the link below and join for study notes,
EBooks and links to papers and to complete Assignments)
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2. Disclaimer about the content of all my study note. (All the links from which
the study note is compiled are mentioned. Please visit the original website or
the E-Book for in-depth study).

INTRODUCTION1
 Why, within a particular industry or market, do some companies outperform
others?
 What is the basis of their (sustained) competitive advantage?
o Efficiency, customer responsiveness, quality, and innovation are the
building blocks of competitive advantage
 Internal analysis is concerned with identifying the strengths and
weaknesses of the company.
 Internal analysis, coupled with an analysis of the company’s external
environment, gives managers the information they need to choose the
strategy and business model that will enable their company to attain a
sustained competitive advantage.

1 Adopted from “Strategic Management, Theory” (11th Ed) by Charles W. L. Hill, Gareth R. Jones, and Melissa A.
Schilling.
 Internal analysis is a three-step process.
o First, managers must understand the process by which companies
create value for customers and profit for the company. Managers must
also understand the role of resources, capabilities, and distinctive
competencies in this process.
o Second, they need to understand the importance of superior
efficiency, innovation, quality, and customer responsiveness when
creating value and generating high profitability.
o Third, they must be able to analyse the sources of their company’s
competitive advantage to identify what drives the profitability of
their enterprise, and where opportunities for improvement might lie.
 The three most important issues of Internal Analysis are:
o First: What factors influence the durability of competitive
advantage?
o Second: Why do successful companies sometimes lose their
competitive advantage?
o Third: How can companies avoid competitive failure and sustain their
competitive advantage over time?

BLUE OCEAN THINKING


Before delving in the understanding of Internal analysis it is important to
understand the space in which the firms operate. Differentiated views of
competitors and customers embodied in strategic groups and market segments
can be taken a step further by ‘Blue Ocean’ thinking2.
Blue Oceans are new market spaces where competition is minimised. On the
other hand, there is ‘Red Oceans’, where industries are already well defined
and rivalry is intense. Red Oceans are associated with bloody competition and
‘red ink’, in other words financial losses.
Whereas Blue Oceans evoke wide empty seas. Blue Ocean thinking, therefore,
encourages entrepreneurs and managers to be different by finding or creating
market spaces that are not currently being served. Strategy here is about
finding strategic gaps, opportunities in the environment that are not being

2 W. Chan Kim and Renée Mauborgne at INSEAD


fully exploited by competitors. The strategy canvas is one framework that can
effectively assist this kind of Blue Ocean thinking. A strategy canvas compares
competitors according to their performance on key success factors in order
to develop strategies based on creating new market spaces.
Strategy Canvas highlights three particular things
1. Critical success factors (CSFs) are those factors that are either
particularly valued by customers or which provide a significant advantage
in terms of cost. Critical success factors are therefore likely to be an
important source of competitive advantage or disadvantage. The above
figure identifies five established critical success factors in the engineering
components segment/strategic group/industry

Critical success factors (CSF) those factors that are either particularly valued by customers or
which provide a significant advantage in terms of costs. [Sometimes called key success factors
(KSF)]

Strategy Canvas for a hypothetical Electrical Component Company


2. Value curves are a graphic depiction of how customers perceive
competitors’ relative performance across the critical success factors. In the
above figure, companies A and B perform well on cost, service, reliability and
quality, but less well on testing. They do not offer any design advice.
Company C has a radically different value curve, characteristic of a ‘value
innovator’.
3. Value innovation is the creation of new market space by excelling on
established critical success factors on which competitors are performing
badly and/or by creating new critical success factors representing
previously unrecognised customer wants. Company C is a value innovator.

Common questions

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Blue Ocean Thinking differs from traditional strategies by focusing on creating uncontested market spaces instead of competing in existing markets, known as Red Oceans. In traditional competitive strategies, companies try to outperform rivals in existing industries, leading to intense competition and often financial losses. Blue Ocean Thinking avoids this by encouraging differentiation through identifying new opportunities and strategic gaps in the market that are not currently served, thus minimizing competition and increasing potential profitability . This approach implications for strategic development include innovation, reevaluating market boundaries, and pursuing untapped customer needs, thereby enabling a company to achieve a sustainable competitive advantage .

Companies can effectively utilize the strategy canvas by mapping out their current strategic profile and identifying critical success factors across their industry. By comparing these factors with competitors and assessing their own performance, they can spot opportunities to create new market spaces. This involves excelling where current competitors fall short or introducing new offerings that appeal to untapped customer needs. By aligning their strategic activities to fill these gaps, companies can innovatively outperform competitors and establish a presence in new, uncontested market spaces .

Internal analysis plays a crucial role in attaining a sustained competitive advantage by identifying the company's strengths and weaknesses, aligning them with strategic opportunities in the market, and differentiating from competitors. The three key issues of internal analysis include understanding factors that influence the durability of competitive advantage, determining why successful companies may lose this advantage, and discovering methods to avoid competitive failure and sustain advantages. Addressing these issues enables a company to align its strategy effectively with market demands and capabilities .

To increase the durability of their competitive advantage, firms can invest in ongoing innovation and continue to develop and leverage unique resources and capabilities. Building a strong brand, fostering customer loyalty, creating high entry barriers for competitors, and continually optimizing internal efficiency are also important strategies. Additionally, firms should foster an adaptable organizational culture that is responsive to changes in the market and technological advancements, ensuring that they can sustain their advantage over time .

Companies implementing 'Blue Ocean' strategies might face challenges such as resistance to change within the organization, difficulty in accurately identifying and exploiting new market spaces, and the risk of imitation by competitors if the new value proposition proves successful. These challenges can be mitigated by fostering a culture of innovation and flexibility, rigorous market research to validate opportunities, strong intellectual property protections, and continuous strategic reassessment to anticipate and adapt to competitor actions .

Managers should follow three steps for effective internal analysis: firstly, they must understand the process of creating value for customers and profit for the company, including recognizing the role of resources, capabilities, and distinctive competencies. Secondly, they should comprehend the importance of superior efficiency, innovation, quality, and customer responsiveness in value creation. Finally, they need to analyze the sources of their company's competitive advantage to identify what drives profitability and areas for improvement, ensuring the company can achieve and sustain a competitive advantage .

Successful companies might lose their competitive advantage due to changes in external factors such as technology shifts, market dynamics, or competitor actions that erode their strengths. Internal issues like complacency, failure to innovate, or inability to adapt to changing environments can also contribute. Companies can prevent this by continuously scanning the environment for changes, investing in innovation, maintaining strong customer relationships, and regularly reassessing their strategic positioning to adapt proactively to market demands and threats .

Luck can play a role in attaining and sustaining a competitive advantage by affecting unforeseen opportunities, timing of decisions, or market shifts that can favorably impact a company's position. However, while luck may offer temporary advantages, sustained success typically requires strategic planning, adaptability, and innovation. Companies should prepare to capitalize on favorable circumstances but rely primarily on robust strategic frameworks to ensure long-term sustainability .

Value curves in a strategy canvas help companies visualize their competitive position by graphically depicting how customers perceive different competitors' performance across key success factors. These curves allow companies to assess areas where they outperform competitors, identify gaps in the market where they might lead through value innovation, and understand strengths and weaknesses relative to industry peers. This facilitates strategic decision-making centered on improving their competitive position by enhancing strengths or addressing areas of underperformance .

Critical success factors (CSFs) are key elements that provide significant value to customers or confer substantial cost advantages. They are vital for achieving competitive advantage or avoiding disadvantages within an industry. Value innovation, on the other hand, involves creating a new market space by excelling in critical success factors where competitors perform poorly or by introducing new factors that meet unrecognized customer wants. Strategic positioning benefits from a keen understanding of these elements, as optimizing CSFs and embracing value innovation can distinguish a company from its competitors and establish a strong market presence .

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