Topic 3: Internal Analysis The Identification of Strengths and Weaknesses

Learning Objectives Understand resources, capabilities/distinctive competencies, and activities Discuss how to assess a resource/capability Discuss how to assess a firm’s financial performance Explain the concept of organizational structure and describe the basic organizational forms

Internal Environment: Key Issues Goals, performance, and strategy Vision, mission, and culture Financial goals and performance What is the firm’s strategy at corporate and business levels? Resources, capabilities, and activities Organizational structure and processes Competitive Advantage Strengths Weaknesses Competitive Disadvantage

Resources

Capabilities and Distinctive Competencies The capacity to deploy resources that have been purposely integrated to achieve a desired end state. Emerge over time through complex interactions among different resources. Are often developed in specific functional areas. Distinctive Competencies Firm-specific strengths that allow a company to differentiate its products from those offered by rivals, and/or achieve substantially lower costs than its rivals.

Capabilities: An Example

Resource/Capability Assessment The VRIO Framework Definition Competitive Implication Valuable The resource/capability helps the firm neutralize threats or exploit opportunities Competitive Parity If the resource/capability is valuable and exploitable, but not rare Rare The resource/capability is not possessed by many others Temporary Competitive Advantage If the resource/capability is valuable, rare, and exploitable, but imitable Inimitable The resource/capability is not easy to copy Causal ambiguity Sustainable competitive advantage If the resource/capability meets all four criteria Organization (Exploitable) The company is organized to exploit the resource/capability

Activities The Firm Value Chain

Outsourcing Outsourcing How to Outsource Effectively? The purchase of a primary activity or a support activity from an external supplier. Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities. Effective outsourcing increases flexibility, mitigate risks, and reduce capital investment How to Outsource Effectively? Do Not outsource activities in which the firm itself can create and capture value. Do Not outsource primary and support activities that are used to neutralize external threats or to utilize external opportunities.

Resources, Capabilities, Activities, and Value Creation Creating value /Making profits How to create value and make profits? How to design activities and develop resources/capabilities?

Assessing Firm Financial Performance Value Creation Profitability of a company depends on the: value customers place on its products (reflecting the utility they get from a product, or, the happiness or satisfaction gained from consuming or owning the product) price it charges for its products. costs of creating those products. More pricing options when customer value is high: raising prices to reflect the value. reducing prices to induce more customers to purchase its products.

Value Creation Model

Value Creation: Pricing Options

Assessing Firm Financial Performance Profitability

Analyzing Profitability: An Example

Assessing Firm Financial Performance Financial Ratios

Organizational Structure The combination of the location of decision-making responsibilities, the formal division of the organization into subunits, and the establishment of integrating mechanisms to coordinate the activities of the subunits. Basic Organizational Structures Functional structure Multidivisional structure Matrix structure

Organizational Structure Three Components Horizontal Differentiation (Organizational Units) The formal division of the organization into subunits. Subunits can be teams/projects, functions/departments, and divisions. Vertical Differentiation (Vertical Relationship) The location of decision making responsibilities within a structure, referring to centralization or decentralization The number of layers in a hierarchy, referring to whether the organization is tall or flat Integrating/Coordinating Mechanisms Processes and procedures used for coordinating subunits Integration/coordination approaches: direct contact; liaison roles; teams; informal mechanisms

Functional Structure: An Example Head Office R&D Production Marketing HRM Purchasing Advantages Simple and inexpensive Rapid decision making Effective in smaller firms and those with a single product category Disadvantages Accountability at the top Poor communications among functional departments Dysfunctional in multiproduct and multimarket firms

Multidivisional Structure: An Example

Multidivisional Structure Advantages and Disadvantages Clear accountability and simplifying control Facilitating comparison between divisions Effective in multiproduct and multimarket firms Disadvantages Functional resources duplicated Dysfunctional competition between divisions Coordination across divisions can be difficult if cooperation is in the best interests of one’s own division

Matrix Structure: An Example Corporate Office Product or Region A Product or Region B Product or Region C Product or Region D R&D Operations Marketing Finance

Matrix Structure Advantages and Disadvantages Multiple channels of communication Functional resources shared Facilitating learning Disadvantages Dual reporting channels Dual sources of reward and punishment Shared authority

The Internal Environment Summary Strengths Weaknesses Superior Returns Strategy The Internal Environment Goals, performance, and strategy Resources, capabilities, and activities Organizational structure and processes Competitive Advantage Competitive Disadvantage