3rd Lecture MSc Agricultural Economics and Management Internal Environment 3rd Lecture MSc Agricultural Economics and Management

External and Internal Analyses General Environment Sociocultural Global Technological Political/Legal Demographic Economic Industry Competitor By studying the external environment, firms identify what they might choose to do Opportunities and threats

External and Internal Analyses By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage) The Firm

Challenge of Internal Analysis How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly?

Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Intraorganizational Conflicts among people making managerial decisions and those affected by them

Choosing the right tools for internal analysis Start with simple techniques Consider all tools and identify those likely to be useful Define the competitive capabilities the enterprise needs Identify the subsystems which support these capabilities Identify core competence relative to competitive capabilities Determine changes to enhance/improve core competence Take a systemic view Adjust the methods of analysis in the light of what is found

Some commonly used techniques for internal analysis Single Businesses Resource Audit Analysis of cost and profit Benchmarking Value Chain Analysis Supply Chain Analysis Multiple Businesses Portfolio Analysis Both Single and Multiple Businesses Core Competencies Shareholder Value Analysis

Resource Audit Resources Quality and Quantity Unique resources Physical Human Financial Other Quality and Quantity Unique resources A good initial analysis

Internal Audit Information from: Parallels process of external audit Management Marketing Finance/accounting Production/operations Research & Development Management information Systems

Marketing Marketing Functions Customer analysis Selling products/services Product & service planning Pricing Distribution Marketing research Opportunity analysis

Finance/Accounting Finance/Accounting Functions Investment decision (Capital budgeting) Financing decision Dividend decision

Production/Operations Production/Operations Functions Process Capacity Inventory Workforce Quality

Research & Development Research & Development Functions Development of new products before competitors Improving product quality Improving manufacturing processes to reduce costs

Management Information Systems Security User-friendly E-commerce

Analysis of Costs and Profit Current sources of profits and trends Recast standard reporting to give new insights Pragmatic approach to get value from time and effort spent A good initial analysis Single Businesses Resource Audit Analysis of cost and profit Benchmarking Value Chain Analysis Supply Chain Analysis

Benchmarking Objective comparison with best in class Simple in theory - Hard in practice Observed differences in performance may be due to differences in parameters Qualitative observations may be more valuable than quantitative

Sales calls/sales person Benchmarking - at three levels Level of Through Examples of measures benchmarking Resources Resource audit Quantity of resources, e.g. · revenue/employee · capital intensity Quality of resources, e.g. · qualifications of employees · age of machinery · uniqueness (e.g. patents) Competences in Analysing activities Sales calls/sales person separate activities Output/ employee Materials wastage Competences Analysing overall Market share through performance Profitability managing linkages Productivity

Value Chain Analysis Basic Value chain Elegant in theory Time-consuming in practice Revised value chain to reflect power of people and knowledge

Value Creation

The Basic Value Chain Margin Margin Technological Development Service Marketing & Sales Human Resource Mgmt. Support Activities Outbound Logistics Firm Infrastructure Procurement Operations Inbound Logistics Primary Activities

it is important to recognize that... To capitalize on the usefulness of the Value Chain concept... it is important to recognize that... 68

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain 69

Value Chains are part of a Total Value System Firm Value Chain Channel Value Chain Buyer Value Chain Supplier Value Chain Upstream Value Perform valuable activities that complement the firm’s activities 70

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Buyer Value Chain Upstream Value Channel Value Chain Perform valuable activities that complement the firm’s activities Each firm must eventually find a way to become a part of some buyer’s value chain 71

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Upstream Value Each firm must eventually find a way to become a part of some buyer’s value chain Perform valuable activities that complement the firm’s activities Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! 72

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Upstream Value Each firm must eventually find a way to become a part of some buyer’s value chain Perform valuable activities that complement the firm’s activities Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! Value chains vary for firms in an industry, reflecting each firm’s unique qualities: History Strategy Success at Implementation 73

Outsourcing Margin Primary Activities Support Activities Outsourcing is the purchase of some or all of a value-creating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement Outsourcing (pp. 122-123) Outsourcing is simply contracting out a portion of the firm’s process to another firm. Firms outsource to varying degrees. BMW USA, for example, outsources virtually everything and the plant here is primarily an assembly line plant. In contrast Apple computers manufactures virtually every component in house, right down to the proprietary software components that make up the operating system. There are benefits to each approach. Building everything in house give the firm’s managers greater control over the quality of the components while outsourcing pushes the burden of raw materials and works-in-process inventories off on the component suppliers and frees up capital for other uses. Using the proceeding examples, if BMW were to keep all processes in house, the plant would need to be exponentially larger. BMW would also then be required to tie up billions of dollars in capital to store raw materials for the various components on site and employ a vast labor force for the manufacture and processing of the components. This would require a vast infrastructure to support the processes. Each year, when making changes to the new car models, a very large outlay of capital and resources to retool the entire operation would be required. By outsourcing the manufacture of these components, this burden is spread across many firms. (Continued on next slide.)

Strategic Rationales for Outsourcing Improve Business Focus lets company focus on broader business issues by having outside experts handle various operational details Provide Access to World-Class Capabilities the specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications Strategic Rationales for Outsourcing Outsourcing (pp. 122-123) (cont.) This diversification leads to a more efficient utilization of resources. For instance, if the new model required a new type of component that had never been previously incorporated into BMW cars, say a turbocharger, this would require adding an entire turbocharger manufacturing plant to the existing factory if everything were to be insourced. There would also be an engineering and learning curve associated with the development of this new component. Using an outsourcing strategy allows BMW to shop for a contract with the manufacturer of highest quality product at the best price currently on the market. In doing so, not only will BMW be freeing up resources that can be better utilized elsewhere in the firm, they are also capitalizing on the expertise of the supplier. (Continued on next slide.)

Strategic Rationales for Outsourcing Accelerate Business Re-Engineering Benefits achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process Share Risks reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Strategic Rationales for Outsourcing (cont.) Outsourcing (pp. 122-123) (cont.) In contrast Apple does virtually everything in house. The problems that this practice has created for the company illustrate the issues that can arise from this type of strategy. For example, the firm had a limited number of design and engineering teams at its disposal. This led to very long lead times in designing and manufacturing of individual components that went into several of its personal computer models. By the time these models were completed and released onto the market, they had been made obsolete by models previously released by Apples competitors, most notably Compaq and IBM. This is illustrated with Apple’s release of the Mac Portable in 1989. This machine took nearly three years to develop and weighed nearly 17 pounds when released. Sales of the machine were nearly nonexistent; Compaq’s LTE, released six weeks after the Mac Portable, was 18 months in development and weighed just less than 7 pounds.

Strategic Rationales for Outsourcing Free Resources for Other Purposes permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

Outsourcing Issues Greatest Value outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced Evaluating Resources and Capabilities don’t outsource activities in which the firm itself can create and capture value Environmental Threats and Ongoing Tasks do not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing organizational tasks

Outsourcing Issues Nonstrategic Team of Resources do not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage Firm’s Knowledge Base do not outsource activities that stimulate the development of new capabilities and competencies

PROCUREMENT AND SUPPLIER MANAGEMENT Revised Value Chain Firm’s infrastructure Technology trapping and commercialisation Strategic Management SUPPORT ACTIVITIES core competence INFORMATION SYSTEMS & KNOWLEDGE MANAGEMENT HUMAN RESOURCE MANAGEMENT basic skills, know-how, technologies strategic assets price, place, promotion product service technical, management, marketing, sales, production customer satisfaction, loyalty PROCUREMENT AND SUPPLIER MANAGEMENT revenue, profit, market share, PRIMARY ACTIVITIES

Product portfolio matrices Stars Question marks Cash cows Dogs High Low RELATIVE MARKET SHARE MARKET GROWTH (a) The original Boston Consulting Group Matrix (BCG) INDUSTRY ATTRACTIVENESS High Med Low Strong Average Weak COMPETITIVE POSITION (b) Attractiveness matrix* 16

Product portfolio matrices (c) Product/market evolution matrix COMPETITIVE POSITION Strong Average Weak Development Growth Shake-out Maturity STAGE OF PRODUCT/ MARKET EVOLUTION Decline (d) Public sector portfolio matrix ABILITY TO SERVE EFFECTIVELY PUBLIC NEED AND SUPPORT + FUNDING ATTRACTIVENESS Golden fleece Back drawer issue High Low Public- sector star Political hot box

Portfolio Analyses Over-coming some pitfalls: Defining `high’ and `low’ (growth or share) can be difficult `Plot’ SBU’s not products Apply to market segments not whole markets Assess the `role’ of each SBU Consider wider resource implications - not just cash Dogs may have a positive role 5

Tests for Core Competence Essential to corporate survival in short and long term Invisible to competitors Difficult to imitate Unique to the enterprise Result from a mix of skills, resources and processes A capability which the organization can sustain over time Greater than the competence of an individual Essential to the development of core products Essential to the implementation of strategic intent Essential to the strategic choices of the enterprise Marketable and commercially viable Few in number

The roots of core competence for a typical manufacturing business Different products, parts, sub-assemblies Knowledge based, person specific professional service Rule or process based provision, of knowledge & functionality CORE COMPETENCE Basic technologies, bodies of knowledge, corporate or individual learning, relationship culture, strategic assets, parts, processes, raw materials, supply chain management Product or Service (as chosen by the customer)

The roots of core competence for typical professional services firms Staff Skills Mindset Inter- personal Skills Professional knowledge Task Personality Embodied as Core Competence Products & Services Collective of the organisation

Components of Internal Analysis Value Creation Discovering Core Competencies Competitive Advantage Core Competencies Capabilities Four Criteria of Sustainable Advantages Value Chain Analysis Resources Tangible Intangible Valuable Rare Costly to Imitate Nonsubstitutable Outsource

Resources, Capabilities and Core Competencies Are the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired end state Emerge over time through complex interactions among tangible and intangible resources Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital

Resources, Capabilities and Core Competencies The foundation of many capabilities lies in: The unique skills and knowledge of a firm’s employees The functional expertise of those employees Capabilities are often developed in specific functional areas or as part of a functional area

Examples of Firms’ Capabilities

Resources, Capabilities and Core Competencies Resources and capabilities that serve as a source of a firm’s competitive advantage: Distinguish a company competitively and reflect its personality Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

Resources, Capabilities and Core Competencies Activities that a firm performs especially well compared to competitors Activities through which the firm adds unique value to its goods or services over a long period of time

Building Sustainable Competitive Advantage Four Criteria of Sustainable Competitive Advantage Valuable Rare Costly to imitate Nonsubstituable

The Four Criteria of Sustainable Competitive Advantage Valuable Capabilities • Help a firm neutralize threats or exploit opportunities Rare Capabilities • Are not possessed by many others Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational culture or brand name • Ambiguous cause: The causes and uses of a competence are unclear • Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers Nonsubstitutable Capabilities • No strategic equivalent

Building Sustainable Competitive Advantage Valuable capabilities Help a firm neutralize threats or exploit opportunities Rare capabilities Are not possessed by many others

Building Sustainable Competitive Advantage Costly-to-Imitate Capabilities Historical A unique and a valuable organizational culture or brand name Ambiguous cause The causes and uses of a competence are unclear Social complexity Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Building Sustainable Competitive Advantage Nonsubstitutable Capabilities No strategic equivalent

Core Competence as a Strategic Capability Resources Inputs to a firm’s production process Core Competence A strategic capability Does it satisfy the criteria of sustainable competitive advantage? Yes Capability An integration of a team of resources The source of No Capability A nonstrategic team or resource

Sustainability of Competitive Advantage Sustainability of competitive advantage is a function of: the rate of core-competence obsolescence due to environmental changes the availability of substitutes for the core competence the imitability of the core competence

Performance Implications Costly to Imitate? Nonsubstitutable Valuable? Competitive Consequences Performance Implications Rare? Competitive Disadvantage Below Average Returns No No No No Yes/ No Competitive Parity Yes No No Average Returns Yes/ No Temporary Com- petitive Advantage Above Average to Average Returns Yes Yes No Sustainable Com- petitive Advantage Above Average Returns Yes Yes Yes Yes

Core Competencies: Cautions and Reminders Never take for granted that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become core rigidities Core rigidities are former core competencies that now generate inertia and stifle innovation

Applying Shareholder Value Analysis Management Decisions Creating Shareholder Value Shareholder Return Dividends Capital Growth Cash from Operations Discount Rate Debt Corporate Objective Valuation Components Duration of Value growth Sales Growth Op. Profit Margin Fixed & Working Capital investment Cost of Drivers Operating Investment Financing

summarise the results of analyses The SWOT diagram may summarise the results of analyses Internal Analyses Strengths Weaknesses Threats Opportunities External Analyses

Strategic Assessment of a business as a whole Questions What business are we really in? What real customer needs do we satisfy? What problem do we solve for our customers?

Summary of Managerial Practices to Adopt Understand a firm's internal strengths and weaknesses before attempting to formulate strategies. Make sure the strategy you develop reflects this understanding by using insights gained from your assessment of the firm's internal strengths and weaknesses to shape your strategies. Recognize that internal resources take three related forms: (1) assets that, when combined with (2) capabilities, result in (3) competencies.

Summary of Managerial Practices to Adopt Use the tests that have been developed as part of the resource-based view of competition to assess the ability of internal resources to yield competitive advantages. Identify the critical success factors for your firm and make sure to emphasize them in assessing the firm's strengths and weaknesses and also in formulating strategy. Use the value chain framework to help identify the contributions various activities make to the firm's profit margins, and let this information guide your internal assessment.

Summary of Managerial Practices to Adopt Identify the firm's core business processes and carefully assess how well they provide value for both external and internal customers by integrating the contributions of various pieces of the value chain. Use a balanced-scorecard approach to evaluating the firm's strengths and weaknesses. You may begin with the financial perspective, but do not stop there. Use the customer, operations, and organizational perspectives to understand the factors that underpin financial performance. Your best chance for influencing financial performance is through factors that only become apparent by adopting these other perspectives.

Summary of Managerial Practices to Adopt Use ratio analysis to assess the financial health of the business in terms of its liquidity, leverage, operating efficiency, and profitability. Don't limit your use of quantitative analysis to financial matters. A well-rounded analysis inevitably draws from nonfinancial matters, and these may lend themselves to quantitative analysis, too. Incorporate qualitative analysis to cover the important aspects of business that are not easily quantified.

Summary of Managerial Practices to Adopt In making comparisons, mix and match different standards (industry' norms, historical data, and benchmarks) to suit your purposes and to overcome the limitations inherent in each.