STRATEGIC MANAGEMENT: INTERNAL ANALYSIS

STRATEGIC MANAGEMENT: INTERNAL ANALYSIS
Key Topics Strengths and Weaknesses Competitive Advantage Resources, Capabilities and Distinctive Competencies Competitive Advantage & Value Creation Value Chain Building Blocks of Competitive Advantage Sustaining Competitive Advantage Copyright © Houghton Mifflin Company. All rights reserved.

The Big Picture: the strategy model
Environ-ment FIRM Strategy Internal Analysis

The Strategy Process Formulation    Analysis  Implementation 

Copyright © Houghton Mifflin Company. All rights reserved.
“In preparing for battle I have always found that plans are useless, but planning is indispensable.” - Dwight D. Eisenhower Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/ Stockdisc/ Getty Images

Internal Analysis The purpose of strategy is to create superior performance (competitive advantage) The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization. Strengths lead to superior performance. Weaknesses lead to inferior performance. Copyright © Houghton Mifflin Company. All rights reserved.

Internal Analysis: Strengths and Weaknesses
Internal analysis - along with the external analysis of the company’s environment - gives managers the information to choose the strategies and business model to attain a sustained competitive advantage. Strengths Of the enterprise are assets that boost profitability Weaknesses Of the enterprise are liabilities that lead to lower profitability Copyright © Houghton Mifflin Company. All rights reserved.

Internal Analysis Internal Analysis includes an assessment of: Quantity and quality of a company’s resources and capabilities Ways of building unique skills and company-specific or distinctive competencies Building and sustaining a competitive advantage requires a company to achieve superior: Efficiency Quality Innovations Responsiveness to customers Copyright © Houghton Mifflin Company. All rights reserved.

Internal Analysis: A Three-Step Process
Understand the process by which companies create value for customers and profit for themselves. Resources + Capabilities  Distinctive competencies Understand the importance of superiority in creating value and generating high profitability. Efficiency Quality Analyze the sources of the company’s competitive advantage. (if any) Strengths – that are driving profitability Weaknesses – opportunities for improvement Innovation Responsiveness to Customers Copyright © Houghton Mifflin Company. All rights reserved.

Competitive Advantage
A firm’s profitability is greater than the average profitability for all firms in its industry. Sustained Competitive Advantage A firm maintains above average and superior profitability and profit growth for a number of years. The Primary Objective of Strategy is to achieve a Sustained Competitive Advantage as measured by Superior Profit and Profit Growth. Copyright © Houghton Mifflin Company. All rights reserved.

Profitability in the Computer Industry, 1998-2003
Dell has achieved a sustained competitive advantage over its rivals. Data Source: Value Line Investment Survey Copyright © Houghton Mifflin Company. All rights reserved.

Strategy, Resources, Capabilities, and Competencies
Figure 3.1 = Copyright © Houghton Mifflin Company. All rights reserved.

Resource Based View of the Firm
(Some kinds of) RESOURCES + (Some kinds of) CAPABILITIES  DISTINCTIVE CAPABILITIES Copyright © Houghton Mifflin Company. All rights reserved.

Distinctive Competencies and Role of Resources & Capabilities
Tangible (physical) and intangible (non-physical) Allow a company to create value for its customers Must have skills to take advantage of the resources Firm-specific and difficult-to-imitate resources as well as valuable resources that create strong demand for a company’s products lead to distinctive competencies = Capabilities Coordinating resources & putting to productive use Skills reside in the organization’s rules, routines and procedures Product of its organization, processes & controls Firm-specific capabilities to manage its resources lead to distinctive competencies Copyright © Houghton Mifflin Company. All rights reserved.

Resources Resources Tangible (physical) and intangible (non-physical) Name some tangible and intangible resources you are likely to find in a business Allow a company to create value for its customers Must have skills to take advantage of the resources Firm-specific and difficult-to-imitate resources as well as valuable resources that create strong demand for a company’s products lead to distinctive competencies Copyright © Houghton Mifflin Company. All rights reserved.

Name some capabilities of organizations
Coordinating resources & putting to productive use Skills reside in the organization’s rules, routines and procedures Product of its organization, processes & controls Name some capabilities of organizations Firm-specific capabilities to manage its resources lead to distinctive competencies Copyright © Houghton Mifflin Company. All rights reserved.

Distinctive Competencies to Gain Competitive Advantage
Firm-specific strengths allow a company to differentiate its products and/or achieve substantially lower costs than its rivals in order to gain a competitive advantage. = Copyright © Houghton Mifflin Company. All rights reserved.

Competitive Advantage, Value Creation, and Profitability
How profitable a company becomes depends on three basic factors: VALUE or UTILITY the customer gets from owning the product PRICE that a company charges for its products COSTS of creating those products Consumer surplus is the “excess” utility a consumer captures beyond the price paid. Basic Principle: the more utility that consumers get from a company’s products or services, the more pricing options the company has. Copyright © Houghton Mifflin Company. All rights reserved.

Value Creation per Unit
Figure 3.2 Copyright © Houghton Mifflin Company. All rights reserved.

Value Creation and Pricing Options
Figure 3.3 There is a dynamic relationship among utility, pricing, demand, and costs. Copyright © Houghton Mifflin Company. All rights reserved.

Comparing Toyota and General Motors
Figure 3.4 Superior value creation requires that the gap between perceived utility (U) and costs of production (C) be greater than that obtained by competitors. Copyright © Houghton Mifflin Company. All rights reserved.

The Value Chain Figure 3.5 A company is a chain of activities for transforming inputs into outputs that customers value – including the primary and support activities. Copyright © Houghton Mifflin Company. All rights reserved.

Do we know what these mean?
Primary Activities Research and Development Production Marketing and Sales Customer Service Copyright © Houghton Mifflin Company. All rights reserved.

Do we know what these mean?
Support Activities Company Infrastructure Organizational structure, culture, control systems Information Systems Systems that provide information needed to manage business Materials Management Logistics for materials flow Human Resources Right people in right place at right time Copyright © Houghton Mifflin Company. All rights reserved.

The Value Chain Figure 3.5 A company is a chain of activities for transforming inputs into outputs that customers value – including the primary and support activities. Copyright © Houghton Mifflin Company. All rights reserved.

The Value Chain Process: Western Perspective ?
R&D Production Marketing Service What could be a better perspective of the same process? Copyright © Houghton Mifflin Company. All rights reserved.

The Value Chain Process
What could be a different perspective of the same process? What do the arrows mean ? What do they say about how products are made? What do they say about the flow of information in the organization? Does R&D need to know anything that marketing knows? Copyright © Houghton Mifflin Company. All rights reserved.

The Value Chain Process: Western Perspective ?
R&D Production Marketing Service What could be a different perspective of the same process? Copyright © Houghton Mifflin Company. All rights reserved.

The Value Chain Process: An Asian Perspective ?
R&D Production Marketing Service Copyright © Houghton Mifflin Company. All rights reserved.

Internal Building Blocks of Competitive Advantage
The Generic Distinctive Competencies Allow a company to: Differentiate product offering Offer more utility to customer Lower the cost structure regardless of the industry, its products, or its services  Figure 3.6    Copyright © Houghton Mifflin Company. All rights reserved.

 Efficiency Measured by the quantity of inputs it takes to produce a given output: Efficiency = Outputs / Inputs Productivity leads to greater efficiency and lower costs: Employee productivity Capital productivity Superior efficiency helps a company attain a competitive advantage through a lower cost structure. Copyright © Houghton Mifflin Company. All rights reserved.

 Quality Quality products are goods and services that are: Reliable and Differentiated by attributes that customers perceive to have higher value The impact of quality on competitive advantage: High-quality products differentiate and increase the value of the products in customers’ eyes. Greater efficiency and lower unit costs are associated with reliable products. Superior quality = customer perception of greater value in a product’s attributes Form, features, performance, durability, reliability, style, design Copyright © Houghton Mifflin Company. All rights reserved.

A Quality Map for Automobiles
Figure 3.7 When customers evaluate the quality of a product, they commonly measure it against two kinds of attributes: 1. Quality as Excellence 2. Quality as Reliability Copyright © Houghton Mifflin Company. All rights reserved.

 Innovation Innovation is the act of creating new products or new processes Product innovation Creates products that customers perceive as more valuable and Increases the company’s pricing options Process innovation Creates value by lowering production costs Successful innovation can be a major source of competitive advantage – by giving a company something unique, something its competitors lack. Copyright © Houghton Mifflin Company. All rights reserved.

 Responsiveness to Customers
Superior quality and innovation are integral to superior responsiveness to customers. Customizing goods and services to the unique demands of individual customers or customer groups. Enhanced customer responsiveness Customer response time, design, service, after-sales service and support Identifying and satisfying customers’ needs – better than the competitors Superior responsiveness to customers differentiates a company’s products and services and leads to brand loyalty and premium pricing. Copyright © Houghton Mifflin Company. All rights reserved.

Competitive Advantage: The Value Creation Cycle

The Durability of Competitive Advantage
The DURABILITY of a company’s competitive advantage over its competitors depends on: Barriers to Imitation Making it difficult to copy a company’s distinctive competencies Imitating Resources Imitating Capabilities Capability of Competitors Strategic commitment Commitment to a particular way of doing business Absorptive capacity Ability to identify, value, assimilate, and use knowledge Industry Dynamism Ability of an industry to change rapidly Competitors are also seeking to develop distinctive competencies that will give them a competitive edge. Copyright © Houghton Mifflin Company. All rights reserved.

Industry Dynamism, Punctuated Equilibrium and Competitive Structure
Figure 2.6 Punctuated Equilibrium occurs when an industry’s long term stable structure is punctuated with periods of rapid change by innovation. Industry Structure revolutionized by innovation Periods of long term stability Copyright © Houghton Mifflin Company. All rights reserved.

Why Companies Fail Inertia Companies find it difficult to change their strategies and structures Prior Strategic Commitments Limit a company’s ability to imitate and cause competitive disadvantage The Icarus Paradox A company can become so specialized and inner directed based on past success that it loses sight of market realities Categories of rising and falling companies: • Craftsmen • Builders • Pioneers • Salespeople When a company loses its competitive advantage, its profitability falls below that of the industry  It loses the ability to attract and generate resources  Profit margins and invested capital shrink rapidly. Copyright © Houghton Mifflin Company. All rights reserved.

Avoiding Failure: Sustaining Competitive Advantage
Focus on the Building Blocks of Competitive Advantage Develop distinctive competencies and superior performance in: Efficiency  Quality Innovation  Responsiveness to Customers Institute Continuous Improvement and Learning Recognize the importance of continuous learning within the organization Track Best Practices and Use Benchmarking Measure against the products and practices of the most efficient global competitors Overcome Inertia Overcome the internal forces that are barriers to change Luck may play a role in success, so always exploit a lucky break - but remember: “The harder I work, the luckier I seem to get.” J P Morgan Copyright © Houghton Mifflin Company. All rights reserved.

The Big Picture: the strategy model
Environ-ment FIRM Strategy Internal Analysis

“Developing a sound and healthy organization requires understanding the environment as much as understanding the organization.” - Gary Hamel Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/ Stockdisc/ Getty Images

Drivers of Profitability (ROIC)

Ways to Increase ROIC Increase Company’s Return on Sales Increase sales revenue more than costs Reduce cost of goods sold Reduce spending on SG&A Sales, Marketing, General & Administrative Expenses Reduce R&D expenses Research & Development       Increase Capital Turnover Reduce the amount of working capital Inventory, Accounts Receivable, Payables Reduce the amount of fixed capital PPE - Property, Plant & Equipment Copyright © Houghton Mifflin Company. All rights reserved.

STRATEGIC MANAGEMENT: INTERNAL ANALYSIS

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