The process of evaluating an organization s resources and capabilities. Provides information on organization s assets, skills, and work activities.

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1 WHAT IS AN INTERNAL ANALYSIS? The process of evaluating an organization s resources and capabilities. Provides information on organization s assets, skills, and work activities. What is good? What is lacking? Most Important - evaluating resources, capabilities, and core competencies. 1

2 INTRO TO INTERNAL ANALYSIS Scanning and analysing the external environment for opportunities and threats is not enough to provide an organization a competitive advantage. Analysts must also look within the corporation itself to identify internal strategic factors critical strengths and weaknesses that are likely to determine whether a firm will be able to take advantage of opportunities while avoiding threats. This internal scanning, often referred to as organizational analysis, is concerned with identifying and developing an organization s resources and competencies. COMPONENTS OF INTERNAL ANALYSIS 2

3 INTRO TO INTERNAL ANALYSIS Resources are an organization s assets and are thus the basic building blocks of the organization - include tangible assets, such as its plant, equipment, finances, and location, human assets, in terms of the number of employees, their skills, and motivation, and intangible assets, such as its technology (patents and copyrights), culture, and reputation. Capabilities refer to a corporation s ability to exploit its resources - consist of business processes and routines that manage the interaction among resources to turn inputs into outputs. INTRO TO INTERNAL ANALYSIS A competency is a cross-functional integration and coordination of capabilities. A core competency is a collection of competencies that crosses divisional boundaries, is widespread within the corporation, and is something that the corporation can do exceedingly well. Thus, new product development is a core competency if it goes beyond one division. When core competencies are superior to those of the competition, they are called distinctive competencies. 3

4 INTRO TO INTERNAL ANALYSIS Four questions to evaluate a firm s competencies: 1. Value: Does it provide customer value and competitive advantage? 2. Rareness: Do no other competitors possess it? 3. Imitability: Is it costly for others to imitate? 4. Organization: Is the firm organized to exploit the resource? INTRO TO INTERNAL ANALYSIS It is important to evaluate the importance of a company s resources, capabilities, and competencies to ascertain whether they are internal strategic factors - that is, particular strengths and weaknesses that will help determine the future of the company. This can be done by comparing measures of these factors with measures of: 1. The company s past performance, 2. The company s key competitors, 3. The industry as a whole. 4

5 INTRO TO INTERNAL ANALYSIS It is important to evaluate the importance of a company s resources, capabilities, and competencies to ascertain whether they are internal strategic factors - that is, particular strengths and weaknesses that will help determine the future of the company. This can be done by comparing measures of these factors with measures of: 1. The company s past performance, 2. The company s key competitors, 3. The industry as a whole. RESOURCES TO GAIN COMPETITIVE ADVANTAGE Five-step, resource-based approach to strategy analysis: 1. Identify and classify the firm s resources in terms of strengths and weaknesses. 2. Combine the firm s strengths into specific capabilities and core competencies. 3. Appraise the profit potential of these capabilities and competencies in terms of their potential for sustainable competitive advantage and the ability to harvest the profits resulting from their use. Are there any distinctive competencies? 5

6 RESOURCES TO GAIN COMPETITIVE ADVANTAGE Five-step, resource-based approach to strategy analysis: 4. Select the strategy that best exploits the firm s capabilities and competencies relative to external opportunities. 5. Identify resource gaps and invest in upgrading weaknesses. RESOURCES TO GAIN COMPETITIVE ADVANTAGE Where do these competencies come from? A corporation can gain access to a distinctive competency in four ways: 1. It may be an asset endowment, such as a key patent, coming from the founding of the company. For example, Xerox grew on the basis of its original copying patent. 2. It may be acquired from someone else. For example, Whirlpool bought a worldwide distribution system when it purchased Philips s appliance division. 6

7 RESOURCES TO GAIN COMPETITIVE ADVANTAGE Where do these competencies come from? A corporation can gain access to a distinctive competency in four ways: 3. It may be shared with another business unit or alliance partner. For example, Apple Computer worked with a design firm to create the special appeal of its personal computers and ipods. 4. It may be carefully built and accumulated over time within the company. For example, Honda carefully extended its expertise in small motor manufacturing from motorcycles to autos and lawnmowers. DETERMINING THE SUSTAINABILITY OF AN ADVANTAGE Two characteristics determine the sustainability of a firm s distinctive competency(ies): durability and imitability. Durability is the rate at which a firm s underlying resources, capabilities, or core competencies depreciate or become obsolete. Imitability is the rate at which a firm s underlying resources, capabilities, or core competencies can be duplicated by others. A core competency can be easily imitated to the extent that it is transparent, transferable, and replicable. 7

8 DETERMINING THE SUSTAINABILITY OF AN ADVANTAGE Transparency is the speed with which other firms can understand the relationship of resources and capabilities supporting a successful firm s strategy. Transferability is the ability of competitors to gather the resources and capabilities necessary to support a competitive challenge. Replicability is the ability of competitors to use duplicated resources and capabilities to imitate the other firm s success. DETERMINING THE SUSTAINABILITY OF AN ADVANTAGE It is relatively easy to learn and imitate another company s core competency or capability if it comes from explicit knowledge, that is, knowledge that can be easily articulated and communicated. Tacit knowledge, in contrast, is knowledge that is not easily communicated because it is deeply rooted in employee experience or in a corporation s culture. Tacit knowledge is more valuable and more likely to lead to a sustainable competitive advantage than is explicit knowledge because it is much harder for competitors to imitate. 8

9 DETERMINING THE SUSTAINABILITY OF AN ADVANTAGE An organization s resources and capabilities can be placed on a continuum to the extent they are durable and can t be imitated (that is, aren t transparent, transferable, or replicable) by another firm. BUSINESS MODELS A business model is a company s method for making money in the current business environment. Composed of five elements: Who it serves What it provides How it makes money How it differentiates and sustains competitive advantage How it provides its product/service 9

10 BUSINESS MODELS The simplest business model is to provide a good or service that can be sold so that revenues exceed costs and expenses. In order to understand how some of these business models work, it is important to learn where on the value chain the company makes its money. Although a company might offer a large number of products and services, one product line might contribute most of the profits. VALUE CHAIN ANALYSIS A value chain is a linked set of value-creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marketing a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer. 10

11 INDUSTRY VALUE CHAIN ANALYSIS The value chains of most industries can be split into two segments, upstream and downstream segments. An industry can be analysed in terms of the profit margin available at any point along the value chain. In analysing the complete value chain of a product, note that even if a firm operates up and down the entire industry chain, it usually has an area of expertise where its primary activities lie. A company s centre of gravity is the part of the chain that is most important to the company and the point where its greatest expertise and capabilities lie its core competencies. INDUSTRY VALUE CHAIN ANALYSIS After a firm successfully establishes itself at this point by obtaining a competitive advantage, one of its first strategic moves is to move forward or backward along the value chain in order to reduce costs, guarantee access to key raw materials, or to guarantee distribution, called vertical integration. 11

12 CORPORATE VALUE-CHAIN ANALYSIS Each corporation has its own internal value chain of activities. Porter proposes that a manufacturing firm s primary activities usually begin with inbound logistics (raw materials handling and warehousing), go through an operations process in which a product is manufactured, and continue on to outbound logistics (warehousing and distribution), to marketing and sales, and finally to service (installation, repair, and sale of parts). CORPORATE VALUE-CHAIN ANALYSIS Several support activities, such as procurement (purchasing), technology development (R&D), human resource management, and firm infrastructure (accounting, finance, strategic planning), ensure that the primary value chain activities operate effectively and efficiently. Each of a company s product lines has its own distinctive value chain. Because most corporations make several different products or services, an internal analysis of the firm involves analysing a series of different value chains. 12

13 CORPORATE VALUE-CHAIN ANALYSIS The systematic examination of individual value activities can lead to a better understanding of a corporation s strengths and weaknesses. According to Porter, Differences among competitor value chains are a key source of competitive advantage. Corporate value chain analysis involves the following three steps: 1. Examine each product line s value chain in terms of the various activities involved in producing that product or service CORPORATE VALUE-CHAIN ANALYSIS 2. Examine the linkages within each product line s value chain. 3. Examine the potential synergies among the value chains of different product lines or business units. 13

14 CORPORATE VALUE-CHAIN ANALYSIS THANKS FOR YOUR ATTENTION! 14