1. Internal Scanning: Organizational Analysis Chapter 5

2. Learning Objectives  Apply the resource-based view of the firm to determine core and distinctive competencies  Use the VRIO framework and the value chain to assess an organization’s competitive advantage and how it can be sustained  Understand a company’s business model and how it could be imitated Copyright © 2015 Pearson Education, Inc. 5-2

3. Learning Objectives  Assess a company’s corporate culture and how it might affect a proposed strategy  Scan functional resources to determine their fit with a firm’s strategy  Construct an IFAS Table that summarizes internal factors Copyright © 2015 Pearson Education, Inc. 5-3

4. Introduction  Scanning and Analyzing the external environment for opportunities and threats is necessary for the firm to be able to understand its competitive environment and its place in that environment.  However, it is not enough to provide an organization with a competitive advantage  Once an organization examines its external environment, it must then look at within itself to identify internal strategic factors (critical strengths and weaknesses) that are likely to determine whether it will be able to take advantage of opportunities while avoiding threats. Copyright © 2015 Pearson Education, Inc. 4

5. A Resource-Based Approach to Organizational Analysis  Organizational analysis  concerned with identifying and developing an organization’s resources and competencies Copyright © 2015 Pearson Education, Inc. 5-5

6. Core and Distinctive Competencies  Resources  an organization’s assets and are thus the basic building blocks of the organization  Tangible (example: equipment, plant)  Intangible (example: Technology, patents 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  Example: A company’s Marketing capability is based on the interaction among its marketing specialists, distribution channels, and sales people.  Dynamic Capabilities are those which are changed and reconfigured to make them more adaptive to the uncertain environment. Copyright © 2015 Pearson Education, Inc. 5-6

7. Competency  A competency is a cross functional integration and coordination of capabilities.  Example: A competency in new product development in one division of a corporation may be the consequence of integrating information systems capabilities, marketing capabilities, R&D capabilities and production capabilities within the division. Copyright © 2015 Pearson Education, Inc. 7

8. Core and Distinctive Competencies  Core competency  a collection of competencies that cross divisional boundaries, is wide-spread throughout the corporation and is something the corporation does exceedingly well  Example: Avon’s core competency is its expertise in door to door selling  Example: Fedex’s core competency is its application of Information technology to all its operations  A company must continually reinvest in a core competency so that it does not turn into a core deficiency (i.e a strength that over time matures and may become a weakness)  A core competency is a very valuable resource!  The more core competencies are used, the more refined they get and the more valuable they become! Copyright © 2015 Pearson Education, Inc. 5-8

9. Core and Distinctive Competencies  Distinctive competency  core competencies that are superior to those of the competition  Example: General Electric is well known for its distinctive competency in management development Copyright © 2015 Pearson Education, Inc. 9

10. VRIO Framework of 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? If the answer is yes to each of the questions, it is considered to be a strength and thus a distinctive competence. Thus, this should give the company a competitive advantage and lead to higher performance Copyright © 2015 Pearson Education, Inc. 5-10

11. Using Resources to Gain Competitive Advantage Grant Proposes a 5 step resource based approach to strategy analysis: 1. Identify and classify resources in terms of strengths and weaknesses 2. Combine the firm’s strengths into specific capabilities and core competencies 3. Appraise profit potential—Are there any distinctive competencies? 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 Copyright © 2015 Pearson Education, Inc. 5-11

12. Access to a Distinctive Competency Where do competencies come from? A corporation can gain access to a distinctive competency in 4 ways:  It may be an Asset endowment (Patent/Xerox)  Acquired from someone else (Disney bought Pixar to reestabliah itself in the animated movie market)  Shared with another business unit (LG used its electronics & production expertise into appliances with success)  Built and accumulated within the company (Honda carefully extended its expertise in small motor manufacturing from motorcycles to autos, boat engines, generators and lawn mowers) Copyright © 2015 Pearson Education, Inc. 5-12

13. Determining the Sustainability of an Advantage  Just because a firm is able to use its resources, capabilities and competencies to develop a competitive advantage does not mean it will be able to sustain it. Two characteristics determine the sustainability of a firm’s distinctive competency(lies):  Durability  the rate at which a firm’s underlying resources, capabilities or core competencies depreciate or become obsolete  Imitability  the rate at which a firm’s underlying resources, capabilities or core competencies can be duplicated by others Copyright © 2015 Pearson Education, Inc. 5-13

14. Determining the Sustainability of an Advantage  A core competency can be easily imitated to the extent that it is transparent, transferrable, and replicable.  Transparency  the speed at which other firms understand the relationship of resources and capabilities supporting a successful strategy.  (Difficult to understand Gillette’s Fusion razor design and production – manufacturing equipment is expensive and complicated)  Transferability  the ability of competitors to gather the resources and capabilities necessary to support a competitive challenge  (Difficult for an olive oil producer to duplicate the Palestinian/Jordanian key resources of land and climate if the imitator is located is located in Canada)  Replicability  the ability of competitors to use duplicated resources and capabilities to imitate the other firm’s success  Difficult for competitors to duplicate P&G’s success in brand management Copyright © 2015 Pearson Education, Inc. 5-14

15. Determining the Sustainability of an Advantage It is relatively easy to learn and imitate another company’s core competency if it comes from explicit knowledge  Explicit knowledge  knowledge that can be easily articulated and communicated  This knowledge can be quickly identified by competitive intelligence.  Tacit knowledge  knowledge that is not easily communicated because it is deeply rooted in employee experience or in the company’s culture  This knowledge is more valuable and more likely to lead to a sustainable competitive advantage because it is much harder for competitors to imitate Copyright © 2015 Pearson Education, Inc. 5-15

16. Value-Chain Analysis  Value chain  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 Copyright © 2015 Pearson Education, Inc. 5-16 Figure 5-1

17. Industry Value Chain Analysis Value chains of most industries can be split into two segments:  Upstream (example: In petroleum industry: oil exploration, drilling and moving crude oil to refinery)  Downstream (example: In petroleum industry: refining the oil, transporting and marketing gasoline and refined oil to distributors and gas stations retailers) Companies vary in the amount of expertise they have at each part of the value chain. Amoco experienced in downstream and BP experienced in upstream merged in 1998 to form BP Amoco.  Center of gravity  the part of the chain that is most important to the company and the point where its core competencies lie Copyright © 2015 Pearson Education, Inc. 5-17

18. Corporate Value Chain Analysis Primary activities  Inbound logistics  Operations  Outbound logistics Support activities  Procurement  Technology development  Human resource management  Firm infrastructure Copyright © 2015 Pearson Education, Inc. 5-18 Each corporation has its own internal value chain of activities. Porter proposes the primary and support activities as listed below. The 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 a competitive advantage.

19. A Corporation’s Value Chain Copyright © 2015 Pearson Education, Inc. 5-19

20. Corporate Value Chain Analysis Analyzing a corporate value chain involves 3 steps: 1. Examine each product line’s value chain in terms of the various activities involved in producing the product or service (strengths/core competencies?, Weaknesses/core deficiencies?, competitive advantage/distinctive competency?) 2. Examine the linkages within each product line’s value chain (connections between activities?) Example: 100% output Quality inspection versus 10% may increase production costs but save on repair people cost) 3. Examine the potential synergies among the value chains of different product lines or business units (economies of scope: value chains of two separate products share activities such as same marketing channels or manufacturing facilities) Copyright © 2015 Pearson Education, Inc. 5-20

21. Basic Organizational StructuresSimpleFunctionalDivisional Strategic Business Units Conglomerate Copyright © 2015 Pearson Education, Inc. 5-21

22. Basic Organizational Structures  Simple Structure  Has no functional or product categories  Appropriate for small, entrepreneur dominated company  One or two product lines  Employees are generalists,jacks-of-all-trades  Stage I company  Functional  Medium sized firm with several product lines in one industry  Employees are specialists in the business functions such as manufacturing, marketing, finance, HR, rtc.  Stage II Company  Divisional  Large corporations with many product lines in several industries  Employees are functional specialists organized according to product/market distinctions  Stage III company Copyright © 2015 Pearson Education, Inc. 22

23. Basic Organizational Structures  Strategic Business Units (SBUs)  A modification of the divisional structure  SBUs are divisions or groups of divisions composed of independent product- market segments that have primary responsibility and authority for the management of their own functional areas  Each SBU has a unique mission, identifiable competitors, external market focus & control of its business functions  Also Stage III  Conglomerate Structure  Large corporation with many product lines in several inrelated industries  A variant of the divisional structure  Subsidiaries operating under one corporate umbrella but controlled through the subsidiaries BOD.  Also Stage III company Copyright © 2015 Pearson Education, Inc. 23

24. Basic Organizational Structures Copyright © 2015 Pearson Education, Inc. 5-24

25. Corporate Culture: The Company Way  Corporate culture  the collection of beliefs, expectations and values learned and shared by a corporation’s members and transmitted from one generation of employees to another. It reflects the values of the founder and the mission It gives the company a sense of identity – R&D at 3M – Shared responsibility at Nucor – Customer Service at Nordstrom – Innovation at Google – Product Quality at BMW Copyright © 2015 Pearson Education, Inc. 5-25

26. Functions of Corporate Culture 1. Conveys a sense of identity for employees 2. Generates employee commitment 3. Adds to the stability of the organization as a social system 4. Serves as a frame of reference for employees to understand organizational activities and as a guide for behavior Copyright © 2015 Pearson Education, Inc. 5-26

27. Corporate Culture: The Company Way  Cultural intensity  the degree of which members of a unit accept the norms, values and other cultural content associated with the unit  shows the culture’s depth  Cultural integration  the extent of which units throughout the organization share a common culture  culture’s breadth Copyright © 2015 Pearson Education, Inc. 5-27

28. Strategic Marketing Issues  Market position & Segmentation  refers to the selection of specific areas for marketing concentration and can be expressed in terms of market, product and geographic locations  Marketing mix  the particular combination of key variables under a corporation’s control that can be used to affect demand and to gain competitive advantage Copyright © 2015 Pearson Education, Inc. 5-28

29. Marketing Mix Variables Copyright © 2015 Pearson Education, Inc. 5-29

30. Brand and Corporate Reputation  Brand  a name given to a company’s product which identifies that item in the mind of the consumer  Corporate brand  a type of brand in which the company’s name serves as the brand Copyright © 2015 Pearson Education, Inc. 5-30

31. Brand and Corporate Reputation  Corporate reputation  a widely held perception of a company by the general public Consists of two attributes:  Stakeholders’ perceptions of quality  Corporation’s prominence in the minds of stakeholders Copyright © 2015 Pearson Education, Inc. 5-31

32. Strategic Research and Development Issues  R&D intensity  spending on R&D as a percentage of sales revenue  principal means of gaining market share in global competition  Technology transfer  the process of taking new technology from the laboratory to the marketplace Copyright © 2015 Pearson Education, Inc. 5-32

33. Experience Curve  Experience curve  unit production costs decline by some fixed percentage each time the total accumulated volume of production units doubles Copyright © 2015 Pearson Education, Inc. 5-33

34. Quality of Work Life and Human Diversity  Human diversity  the mix in the workplace of people from different races, cultures and backgrounds  provides a competitive advantage Copyright © 2015 Pearson Education, Inc. 5-34

35. Strategic Information Systems/Technology Issues Information systems/technology contributions to performance:  Automation of back office processes  Automation of individual tasks  Enhancement of key business functions  Development of a competitive advantage Copyright © 2015 Pearson Education, Inc. 5-35

36. Strategic Information Systems/Technology Issues  Web 2.0  the use of wikis, blogs, RSS (Really Simple Syndication), social networks (e.g., LinkedIn and Facebook), podcasts and mash-ups through company Web sites to forge tighter links with customers and suppliers and to engage employees more successfully Copyright © 2015 Pearson Education, Inc. 5-36

37. Internal Factor Analysis Summary Copyright © 2015 Pearson Education, Inc. 5-37

38. Note Copyright © 2015 Pearson Education, Inc. 38 Please refer to the text book pages 162 and 165 for a deeper understanding of how to create an IFAS table for your Strategic Audit NOW YOU CAN: Start your SWOT Analysis Design your EFAS, IFAS tables.