Doing An Internal Analysis Strategic Management 3 Assessing Strengths and Weaknesses: Doing An Internal Analysis This chapter shifts the focus of the discussion to a firm’s internal environment. This complements the discussion of the external environment in chapter 3.

Learning Outline What is an internal analysis? Define internal analysis. Describe the relationship between organizational resources, organizational capabilities, core competencies, and distinctive capabilities. Explain what organizational strengths and weaknesses are. How to do an internal analysis Describe the primary and support activities on the value chain. Explain what an internal audit is and how it can be used for internal analysis. Describe the steps in a capabilities assessment profile. The learning outline has 3 major parts. The first defines internal analysis while the second goes into the practical aspects of conducting an internal analysis.

Learning Outline (contd.) Why do an internal analysis? Explain the criteria that could be used to assess an organization’s strengths and weaknesses. Discuss why an internal analysis is important. The third part of the learning outlines looks at the rationale for conducting an internal analysis.

What is an Internal Analysis? Identifies and evaluates resources, capabilities, and core competencies Looks at the organization’s Current vision Mission Strategic objectives Strategies The resource-based view (RBV) was introduced in chapter 2. Internal analysis identifies a company’s resources, capabilities, and core competencies. It also focuses on the four items listed above.

A Quick Review of Organizational Resources Organizational Resources (assets) • Financial resources Physical assets Human resources Intangible resources Structural-cultural resources Examples of financial resources: debt capacity, credit lines, etc. Examples of physical assets: buildings, equipment and fixtures Examples of human resources: experience, knowledge, etc. of employees Examples of intangible resources: brand names, patents Examples of structural-cultural resources: culture, work systems

Competitive Advantage Distinctive Organizational The Strategic Role of Organizational Resources and Organizational Capabilities Performance Results Competitive Advantage Distinctive Organizational Capabilities Organizational Capabilities Organizational Resources Core Competencies Although an organization’s tangible and intangible resources can be a source of competitive advantage, they play a more important role (as the figure indicates) in determining an organization’s capabilities and core competencies. Financial assets Physical assets Human resources Intangible assets Structural-cultural assets Organizational processes and routines Accumulated knowledge Actual work activities

From Capabilities to Distinctive Capabilities & Core Competencies Organizational Capabilities • Special and unique capabilities • Distinguish from competitors • Sustainable competitive advantage • Outperform competition Distinctive Organizational Capabilities Organizational Capabilities Core Competencies Organizational Capabilities • Org. capabilities come first • Fundamental building block for developing core competencies • Organizational processes and routines to get the work done Core Competencies • Not a source of competitive advantage • Develop distinctive organizational capabilities • Improve and enhance organizational capabilities • Fundamental skills and capabilities • Exploitable by organization • Major value-creating skills and capabilities This figure helps distinguish between distinctive organizational capabilities on the one hand and organizational capabilities and core competencies on the other. It also indicates the relationship between these 3 concepts.

Characteristics of Distinctive Organizational Capabilities • Contributes to Superior Customer Value Distinctive Organizational Capabilities These are the 3 characteristics that make capabilities truly distinctive. Example of the first (superior customer value): Timex’s easy to use alarm clocks Example of the second (difficult to imitate): Anheuser-Busch’s data mining Example of the third (used in a variety of ways): Honda’s engine design • Can Be Used in a Variety of Ways • Is Difficult for Competitors to Imitate

From Capabilities to Distinctive Capabilities & Core Competencies Organizational Capabilities • Special and unique capabilities • Distinguish from competitors • Sustainable competitive advantage • Outperform competition Distinctive Organizational Capabilities Organizational Capabilities Core Competencies Organizational Capabilities • Org. capabilities come first • Fundamental building block for developing core competencies • Organizational processes and routines to get the work done Core Competencies • Not a source of competitive advantage • Develop distinctive organizational capabilities • Improve and enhance organizational capabilities • Fundamental skills and capabilities • Exploitable by organization • Major value-creating skills and capabilities This slide focuses on capabilities and core competencies and their relationship to distinctive organizational capabilities.

The Role of Strengths and Weaknesses Strengths: Resources that an organization possesses and capabilities that an organization has developed. Both can be exploited and developed into a sustainable competitive advantage Weaknesses: Resources and capabilities that are lacking or deficient. Prevent an organization from developing a sustainable competitive advantage The whole reason for doing an internal analysis is to assess what the organization has or doesn’t have (resources) and what it can and can’t do (capabilities) – i.e., its strengths and weaknesses. The slide links both strengths and weaknesses to sustainable competitive advantage.

Value Chain Analysis The premise behind value chain analysis is that customers demand value from goods and services they obtain Customer value Product is unique and different Product is low priced Quick response to specific or distinctive customer needs A value chain is a systematic way of examining organization’s functional activities The value chain is an important technique for analyzing an organization’s internal situation. It views an organization’s work as a series of value-creating activities. Michael Porter (the same person who created the five forces model – chapter 3 ) developed the concept of the value chain.

Primary and Support Activities in the Value Chain { Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Operations Service { MARGIN Inbound Logistics Outbound Logistics Marketing and Sales The 9 activities of the value chain are divided into five primary and four support activities. Tables 4.1 and 4.2 (in the text) lists some questions to ask in assessing the primary and support activities of the value chain. Primary Activities

Value Chain Analysis Inbound Logistics Operations • Assessing the PRIMARY Activities in the Value Chain Inbound Logistics Materials control system Inventory control system Raw material handling and warehousing • Operations Equipment comparison to competitors Plant layout Production control system Level of automation in production processes • This slide looks at the key assessment areas under each of the first 2 primary activities.

Value Chain Analysis Outbound Logistics Marketing and Sales Assessing the PRIMARY Activities in the Value Chain (continued) Outbound Logistics Timeliness and efficiency of finished products delivery Warehousing of finished products • Marketing and Sales Marketing research Sales promotions and advertising Alternative distribution channels Competency and motivation of sales force Organization’s image of quality Organization’s reputation Brand loyalty of customers Domination of various market segments • This slide looks at areas for assessment under primary activities 3 and 4.

Value Chain Analysis Customer Service Assessing the PRIMARY Activities in the Value Chain (continued) Customer Service • Customer input for product improvements Handling of customer complaints Warranty and guarantee policies Employee training in customer education & service issues Replacement parts and services This slide looks at the areas covered by the last primary activity.

Technological Development Value Chain Analysis Assessing the SUPPORT Activities in the Value Chain Procurement Alternate sources for obtaining needed resources Timeliness of resources procurement Procurement of large capital expenditure resources Lease-versus-purchase decisions Long-term relationships with reliable suppliers • Technological Development R&D activities in product and process innovations Relationship between R&D and other departments Meeting deadlines in technological development activities Quality of labs and other research facilities Qualifications of lab technicians and scientists Creativity and innovation in organizational culture • This slide covers assessment areas in the first two support activities.

Human Resource Management Value Chain Analysis Assessing the SUPPORT Activities in the Value Chain (continued) Human Resource Management • Recruiting, selecting, orienting, and training employees Employee promotion policies Reward systems to motivate and challenge employees Absenteeism and turnover Union-organization relations Employee participation in professional organizations Employee motivation, job commitment, and satisfaction Areas to cover in the HRM activity are listed here.

Value Chain Analysis Firm Infrastructure • Assessing the SUPPORT Activities in the Value Chain (continued) Firm Infrastructure • Identification of external opportunities and threats Accomplishing goals with strategic planning system Coordination and integration of value chain activities Low-cost capital expenditures & working capital funds IS support for strategic and operational decisions Relationships with stakeholders Public image as a responsible corporate citizen This slide looks at areas covered by firm infrastructure.

Using an Internal Audit An internal audit thoroughly assesses an organization's various internal functional areas Six Primary Functional Areas • Productions-Operations Marketing Research and Development Financial and Accounting Management (including HRM) Information Systems An internal audit is the second approach to assessing strengths and weaknesses of an organization. Table 4.3 (in the text) provides a detailed list of important internal audit questions in each of the six areas listed above.

Capabilities Assessment Profile Complex Analysis of Capabilities Not as easily identifiable as organizational functions Hard for competitors to imitate Two-phased Capability Assessment Phase I: Identify distinctive capabilities Phase II: Develop and leverage these distinctive capabilities The third and final approach for doing an internal analysis is a capabilities assessment profile. It is an in-depth evaluation of an organization’s capabilities in order to determine strengths and weaknesses.

Identifying Distinctive Organizational Capabilities Step 1 Prepare current product-market profile. Identify sources of competitive advantage and disadvantage in the main product-market segments. Step 2 Step 3 Describe all the organizational capabilities and competencies. Capabilities assessment profile is done in two phases (as indicated in the previous slide). This figure illustrates the steps in phase I. Sort the core capabilities and competencies according to strategic importance. Step 4 Identify and agree on the key capabilities and competencies. Step 5

Criteria to Judge Organizational Strengths and Weaknesses Past Performance Trends Comparison Against Competitors Are organizational resources and capabilities strengths or weaknesses? To assess whether resources and capabilities are strengths or weaknesses and whether certain ones could be sources of sustainable competitive advantage, the four criteria listed above are used. Personal Opinions of Strategic Decision Makers or Consultants Specific Goals or Targets

Why Do an Internal Analysis? It is the only way to identify an organization’s strengths and weaknesses It’s needed for making good strategic decisions Two important reasons for doing an internal analysis are listed. With the information from an internal analysis, strategic decision makers can make intelligent judgments about what competitive advantages the organization might currently have, what might potentially be developed into competitive advantages, and what might be preventing competitive advantages from being developed.

? Chapter Three Developing and exploiting distinctive competencies Three approaches to internal analysis Know the What, How and Why ?