Strategy: Choices and Change MN6003 Session 7 (w/c 10/11/2014) Internal analysis Lecturer: Syed Naqavi Strategy Theme: Strategic Analysis and Choice Version: Issue 14/10/14

Re-cap of last week’s session (External Analysis 2) What did we talk about last time? image: http://3d-animated-gif.blogspot.co.uk/2010_05_01_archive.html

Internal Analysis Today’s Objectives Develop our understanding of internal strategic analysis Consider a range of internal analysis tools Resource and competence framework McKinsey Seven S Value chain analysis Financial analysis Reading for this week Exploring Strategy Chapter 3 Strategic Capabilities

Layers of the business environment source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 1

Purpose of Internal Analysis Internal analysis is the systematic evaluation of the key internal features of an organisation Identify internal strengths and weaknesses that are key to successful organisational performance Consider ability to respond to threats & opportunities identified in external analysis Identify, explore and clarify key issues that will need to be addressed in your future strategy

Internal Perspective Resource-based strategy The resource-based view (RBV) of strategy asserts that the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities. http://www.samdiener.com/wp-content/uploads/2009/12/different-3.jpg source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

Resources and competences Resources are the assets that organisations have or can call upon (e.g. from partners or suppliers),that is, ‘what we have’. Competences are the ways those assets are used or deployed effectively, that is, what we do well’. source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

adapted from Johnson & Scholes, Exploring Corporate Strategy, 2008 Resource Analysis (What the organisation has) Physical resources e.g. machines, buildings, production capacity Financial resources e.g. capital, cash, suppliers of money (shareholders, bankers etc) Human resources e.g. number and mix of people, skills and knowledge Intellectual capital e.g. patents, brands, customer databases Q What are the resources that a UK Premiership football club need to be successful? adapted from Johnson & Scholes, Exploring Corporate Strategy, 2008 8

adapted from Johnson & Scholes, Exploring Corporate Strategy, 2008 Competence Analysis (How we use resources - what the organisation is good at) Functional capability e.g. marketing capability, procurement capability Internal linkages / cross functional capability e.g. good links between sales & procurement; capability in new product development External linkages (the value system) e.g. capability in developing strong supplier or distributor relationships Management capability e.g. capability in knowledge management; capability in training and career development Specialised capability e.g. miniaturisation, developing thin adhesives (3M Post Its) Q What are the competencies that a UK Premiership football club need to be successful? (think about what the organisation needs to be good at doing) adapted from Johnson & Scholes, Exploring Corporate Strategy, 2008 9

Sustainable Competitive Advantage requires resources and competences that are unique or difficult to imitate Threshold and distinctive capabilities source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

Analysing Internal Organisation Design McKinsey 7-S framework source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 13

Analysing Internal Organisation Design McKinsey 7 S - Hard Elements Strategy Does the company have a clear and credible strategy? Is the process for setting and changing direction too rigid or too emergent? Structure Does the organisational structure of the company support the strategy? Is the structure very flat or very hierarchical? Systems Do the processes and procedures - everything about how the work is done - support the organisation’s strategy? Is there sufficient flexibility and control? source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 13

Analysing Internal Organisation Design McKinsey 7 S - Soft Elements Skills Does the organisation have resources and competences to be successful? Does it need to focus on existing competences or develop new ones? Style Is the leadership style of the organisation and how managers behave aligned to the strategy? Is the managerial style too transactional or is it transformational? Staff Are there the right number and type of people in the organisation? Are the reward schemes aligned to the strategy? Superordinate Goals (Shared Values or Culture) Is the organisational culture aligned to the strategy? What are the common beliefs, attitudes and ideals? What does it feel like to work here? source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 13

Seven S Analysis: Student Example (find as much information as you can from news articles, company website, business reports etc.) Seven S Strengths Weaknesses Strategy Flexible approach to planning. Clear sense of direction Very much top down – don't involve middle managers or customer facing staff Structure Clear chain of command, clear roles and responsibilities Overly bureaucratic and might benefit from a flatter structure Systems Joined up processes e.g. new produce development. Excellent customer management system Could improve systems for internal communications and also customer complaints handling Skills Staff are highly skilled in IT and media areas Possible skills weakness is internal comms and perhaps creative thinking Style (leadership) Leaders are very experienced and charismatic and well respected in industry Leaders tend to be remote from front line staff and perception is that they don't listen enough. Would benefit from being more friendly and accessible Staff Over 1,000 employees, good training and rewards, good level of motivation Potentially overstaffed vs. competitors. Labour is 80% of costs (only 72% for main rival). Shared Values (culture) Strong sense of organisational purpose and commitment to goals across organisation Not seen as a 'listening' culture. Senior managers seen as remote.

The value chain The value chain describes the categories of activities within an organisation which, together, create a product or service. The value chain invites the strategist to think of an organisation in terms of sets of activities – sources of competitive advantage can be analysed in any or all of these activities. source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

Value Chain Analysis Original source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

A Value Chain Example (too small to read but it’s in your slide pack) A student example 17

Uses of the value chain A generic description of activities – understanding the discrete activities and how they both contribute to consumer benefit and how they add to cost. Identifying activities where the organisation has particular strengths or weaknesses Analysing the competitive position of the organisation using the VRIN criteria – thus identifying sources of sustainable advantage. Looking for ways to enhance value or decrease cost in value activities (e.g. outsourcing) source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

Q/ Think about the following companies, how do they create value Ryan Air Just Eat Google

Financial Performance (1) strengths and weakness analysis Check out the company’s report and accounts and investor presentations and look at: Quantified statements about strength in terms of size, market share etc Revenue and profit (compare with competitors and compare current year with previous years – can you pick out any trends?) Costs (what are their main costs? - compare with competitors and trends over time)

Financial Performance (2) strengths and weakness analysis Financial strengths and weakness in particular segments e.g. products, customer groups, geographic areas If you’ve done an accounting module then do some simple ratio analysis like ROCE (Return on Capital Employed) Look up share price and dividend performance (compared to competitors and over time) You might also find analysts reports or newspaper articles on the company’s financial results

SWOT analysis SWOT summarises the strengths, weaknesses, opportunities and threats likely to impact on strategy development. INTERNAL STRENGTHS WEAKNESSES ANAYSIS EXTERNAL OPPORTUNITIES THREATS ANALYSIS source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

Uses of SWOT analysis Key opportunities and threats from external environmental impacts are identified using external analytical tools e.g. PESTEL, five forces, competitor benchmarking, strategic grouping maps Major strengths and weaknesses are identified using internal analytic tools e.g. resource and competence analysis, value chain analysis, McKinsey Seven S analysis, financial analysis source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

In summary The resource-based view (RBV) of strategy asserts that the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities. Internal analysis models and theories can be used to analyse an organisation’s strategic capabilities and identify key strengths and weaknesses and sources of sustainable competitive advantage. source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 3

10 minute When we come back we will look at Business Plan Purpose of Business Plan Content of Business Plan Sources of Funding