5 internal analysis


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5 internal analysis

  1. 1. 1 INTERNAL ANALYSIS Dr.L.Prakash Sai  Activity System is a less linear way of thinking about the internal fit that supports strategy.  Activity Map crucially interrelated features and functions that define a firm‟s unique skills and strategy.  It supports competitive advantage with reinforcing patterns or systems. CORE COMPETENCE & ACTIVITY SYSTEM A company‟s core competences can be defined as the activities for which resources are deployed in such a way that they achieve a differential and sustainable competitive advantage in the marketplace. The core competences may be direct activities such as:  product design (e.g. the Dyson vacuum) or  customer service (e.g. John Lewis staff), or  they may be indirect (e.g. trust in the Shell brand). Whether direct or indirect, the activities are usually broad in scale and scope, thereby maximizing return.
  2. 2. 2 Limited Customer Service Modular Designs Low Mfg Cost Self- service Selection Self- transport Limited sales staff Customer loyalty Self - assembly Suburban Location Most items in stock Design focused on low cost Explanatory labeling Easy transport Flat packing kits Wide variety Long-term suppliers Year- round stocking On-site inventory Impulse buying High- traffic store layout Easy to make Ikea’s Activity System Value-Chain Analysis • Sequential process of value-creating activities • The amount that buyers are willing to pay for what a firm provides them • Value is measured by total revenue • Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service
  3. 3. 3 The Value Chain (Manufacturing) General administration / Firm Infrastructure Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service Relationship with Suppliers Relationship with Buyers Primary Activities Associated with receiving, storing and distributing inputs to the product – Location of distribution facilities – Material and inventory control systems – Systems to reduce time to send “returns” to suppliers – Warehouse layout and designs Inbound Logistics
  4. 4. 4 Associated with transforming inputs into the final product form – Efficient plant operations – Appropriate level of automation in manufacturing – Quality production control systems – Efficient plant layout and workflow design Inbound Logistics Operations Primary Activities Primary Activities Associated with collecting, storing, and distributing the product or service to buyers – Effective shipping processes – Efficient finished goods warehousing processes – Shipping of goods in large lot sizes – Quality material handling equipment Inbound Logistics Operations Outbound Logistics
  5. 5. 5 Associated with purchases of products and services by end users and the inducements used to get them to make purchases – Highly motivated and competent sales force – Innovative approaches to promotion and advertising – Selection of most appropriate distribution channels – Proper identification of customer segments and needs – Effective pricing strategies Inbound Logistics Operations Outbound Logistics Marketing and Sales Primary Activities Associated with providing service to enhance or maintain the value of the product – Effective use of procedures to solicit customer feedback and to act on information – Quick response to customer needs and emergencies – Ability to furnish replacement parts – Effective management of parts and equipment inventory – Quality of service personnel and ongoing training – Warranty and guarantee policies Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Primary Activities
  6. 6. 6 Typically supports the entire value chain and not individual activities – Effective planning systems – Ability of top management to anticipate and act on key environmental trends and events – Ability to obtain low-cost funds for capital expenditures and working capital – Excellent relationships with diverse stakeholder groups – Ability to coordinate and integrate activities across the value chain – Highly visible to inculcate organizational culture, reputation, and values General Administration Support Activities Support Activities Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel – Effective recruiting, development, and retention mechanisms for employees – Quality relations with trade unions – Quality work environment to maximize overall employee performance and minimize absenteeism – Reward and incentive programs to motivate all employees General Administration Human Resource Management
  7. 7. 7 Related to a wide range of activities and those embodied in processes and equipment and the product itself – Effective R&D activities for process and product initiatives – Positive collaborative relationships between R&D and other departments – State-of-the art facilities and equipment – Culture to enhance creativity and innovation – Excellent professional qualifications of personnel – Ability to meet critical deadlines General Administration Human Resource Management Technology Development Support Activities Function of purchasing inputs used in the firm‟s value chain – Procurement of raw material inputs – Development of collaborative “win-win” relationships with suppliers – Effective procedures to purchase advertising and media services – Analysis and selection of alternate sources of inputs to minimize dependence on one supplier – Ability to make proper lease versus buy decisions General Administration Human Resource Management Technology Development Procurement Support Activities
  8. 8. 8 Strategic decisions in the value chain Firm Infrastructure: cost-effective management information systems, few managerial layers, simplified planning practices. Human Resources: consistent policies to reduce turnover, intense focus on training employees to be efficient and multi-skilled. Technology: Easy-to-use production technologies, investment in technology that improves production efficiencies. Procurement: procedures to find the lowest cost inputs, frequent evaluation of suppliers‟ performances. Inbound Logistics Efficient systems to link supplier products with production processes. Operations Use of Economies of scale. Construction of efficient scale facilities. Outbound Logistics Delivery schedule that reduces costs. Selection of low-cost carriers. Marketing & Sales Small, highly trained sales force. Products priced to generate sales volume. Service Efficient quality control to reduce buyer complaints. The Value Chain for a Low Cost Strategy
  9. 9. 9 Firm Infrastructure: Highly developed MIS to capture customer preferences, firm-wide focus on high-quality products. Human Resources: Compensation encourages creativity, subjective performance measures, superior training. Technology: Strong capability in basic research, investment in technologies that allow for production of highly differentiated products. Procurement: Procedures to find the highest quality inputs, purchase of highest quality replacement parts, strict standards for suppliers. Inbound Logistics Superior handling to minimize damage & improve quality. Operations Consistent production of attractive products. Rapid response to customers‟ production demands. Outbound Logistics Accurate and responsive order processing. Rapid and timely deliveries. Marketing & Sales Extensive granting of credit buying. Extensive personal relationships with buyers. Service Extensive buyer training to assure max. value from Product. The Value Chain for a Differentiation Strategy INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING AND SALES SERVICE PROCUREMENT TECHNOLOGY DEVELOPMENT HUMAN RESOURCE MANAGEMENT FIRM INFRASTRUCTURE Financial Policy – Accounting - Regulatory Compliance - Legal - Community Affairs Pilot Training Safety Training Agent Training In-flight Training Baggage Tracking System • Promotion • Advertising • Advantage Program • Travel Agent Programs • Group Sales • Ticket Counter Operations • Gate Operations • Aircraft Operations • On-board Service • Baggage Handling • Ticket Offices • Route Selection • Passenger Service System • Yield Mgmt System (Pricing) • Fuel • Flight and Crew Scheduling • Facilities Planning • Aircraft Acquisition Information Technology Communications Product Development Market Research • Lost Baggage Service • Complaint Follow-up • Baggage System • Flight Connections • Rental Car and • Hotel Reservation System Computer Reservation System, In-flight System, Flight Scheduling System, Yield Management System Baggage Handling Training Flight, route and yield analyst training Airline Industry: Value Chain
  10. 10. 10 Resource-Based View (RBV) of the Firm • Two perspectives – The internal analysis of phenomena within a company – An external analysis of the industry and its competitive environment • Resources and Capabilities – Tangible resources – Intangible resources – Organizational capabilities Types of Resources Relatively easy to identify, and include physical and financial assets used to create value for customers – Financial resources • Firm‟s cash accounts • Firm‟s capacity to raise equity • Firm‟s borrowing capacity – Physical resources • Modern plant and facilities • Favorable manufacturing locations • State-of-the-art machinery and equipment Tangible Resources
  11. 11. 11 – Technological resources • Trade secrets • Innovative production processes • Patents, copyrights, trademarks – Organizational resources • Effective strategic planning processes • Excellent evaluation and control systems Types of Resources Tangible Resources Relatively easy to identify, and include physical and financial assets used to create value for customers Types of Resources Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time: – Human • Experience and capabilities of employees • Trust • Managerial skills • Firm-specific practices and procedures – Innovation and creativity • Technical and scientific skills • Innovation capacities – Reputation • Effective strategic planning processes • Excellent evaluation and control systems Tangible Resources Intangible Resources
  12. 12. 12 Capabilities Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end – Outstanding customer service – Excellent product development capabilities – Innovativeness of products and services – Ability to hire, motivate, and retain human capital Tangible Resources Intangible Resources Organizational Capabilities Capabilities FUNCTION CAPABILITY EXAMPLE Corporate HQ Expertise in management of multi-business corporation GE ABB R&D Speed of new product development Canon Sony Manufacturing Continual improvements in production or assembly process Toyota Komatsu Dell Marketing Brand management P&G Coke
  13. 13. 13 The resource-based view (RBV) • What explains differences in firms‟ profitability and sustainable advantage? – Decisions about products, markets, positioning are important – but too easy to copy – Environments affect profits – but performance differs between firms in similar environments • RBV: individual resources are basis of competitive strength if properly exploited – Developed over time (path dependent) – Dependent on tacit knowledge – Generate “economic rents” The VRIO Framework If a firm has resources that are: • valuable, • rare, and • costly to imitate, and… • the firm is organized to exploit these resources, then the firm can expect to enjoy a sustained competitive advantage.
  14. 14. 14 Applying the VRIO Framework The Question of Value  in theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat?  the practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (Levi’s reputation allows it to charge a premium for its Docker’s pants) Applying the VRIO Framework The Question of Rarity  if a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits)  a resource must be rare enough that perfect competition has not set in  thus, there may be other firms that possess the resource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-lowering drugs, but the drugs are still scarce — look at prices)
  15. 15. 15 Applying the VRIO Framework Valuable and Rare If a firm‟s resources are: The firm can expect: Not Valuable Competitive Disadvantage Valuable, but Not Rare Competitive Parity Valuable and Rare Competitive Advantage (at least temporarily) The Question of Imitability • the temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a cost disadvantage in imitating the resource » intangible resources are usually more costly to imitate than tangible resources and bundles of resources are more costly than single resources Applying the VRIO Framework (Harley-Davidson’s bikes’ styles – bikes may be easily imitated, but its reputation cannot be)
  16. 16. 16 Costs of Imitation • Unique Historical Conditions – First mover advantages – Path dependence • Causal Ambiguity – Causal links between resources and competitive advantage may not be understood – Bundles of resources fog these causal links • Social Complexity – The social relationships entailed in resources may be so complex that managers cannot really manage or replicate them • Patents – Offer a period of protection if the firms is able to defend its patent rights – Can be a two-edged sword as firms disclosure may decrease costs of imitation by other firms Applying the VRIO Framework The Question of Organization  a firm‟s structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firm‟s resources  examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc.  these structure and control mechanisms complement other firm resources taken together, they can help a firm achieve sustained competitive advantage (3M Company – rewards innovation and risk-taking)
  17. 17. 17 The VRIO Framework Valuable? Rare? Costly to Imitate? Exploited by Organization? Competitive Implications No Yes Yes Yes Yes Yes Yes Yes No No No Disadvantage Parity Temporary Advantage Sustained Advantage Economic Implications Below Normal Normal Above Normal Above Normal ‘Strategic’ resources meet the VIRUS criteria Valuable - makes appreciable difference to: – cost and/or differentiation advantage – capacity to adapt or innovate – (otherwise, just represents wasted effort) Inimitable (otherwise will be copied/bought) Rare (= distinctive) in the industry – (otherwise, it is only a threshold resource) UnSubstitutable (or firms will use alternatives) Few resources satisfy ALL these criteria
  18. 18. 18 Different types of resource • Assets: things a firm has – Reputation, infrastructure, database – „Strategic assets‟ if it meets VIRUS test • Things a firm does with assets are: – Capabilities: contribute directly to competitiveness – Competences: deeper understanding of specialist field – Incorporate routines developed over time – Distinctive capabilities or core competences if it meets VIRUS criteria Dynamic capabilities  Dynamic capabilities allow an organization to upgrade its resources in response to environmental change  Include the ability to: – detect and assess environmental change, – Learn, exploit knowledge, innovate – manage across multiple product development schedules – transcend technology cycles and integrate technologies across disparate units
  19. 19. 19 Dell: Competitive Advantage Competitive Dynamics of Resource Imitation Competitive Dynamics: • the strategic decisions and actions of firms in response to the strategic decisions and actions of other firms Firm A (strategy decisions lead to competitive advantage) Firm B‟s Possible Responses No Response Change Tactics Change Strategy
  20. 20. 20 Competitive Dynamics  the other firm is serving a different market  a response may hurt its own competitive advantage  it does not have the resources and capabilities to mount an effective response  it wants to reduce or manage rivalry in the market through tacit collusion A firm may decide to take no action because: “No Action” Response (Rolex Casio) Competitive Dynamics “Change” Responses Tactics (Tide) Strategy (Monsanto) specific actions tweaking product characteristics usually imitated so quickly that there is no advantage a „leapfrog‟ move may create advantage  a fundamental change in a firm‟s theory  may be necessary if current strategy becomes obsolete  a mimetic change may achieve parity, but not advantage
  21. 21. 21 The Resource-Based View Resources & Capabilities Competitive Advantage • Valuable • Rare • Costly to Imitate • Organized to Exploit CA will be sustained if: • other firms‟ costs of imitation are greater than benefit of imitation • the firm is organized to exploit advantages Managers‟ Job: • bundle resources and capabilities to achieve competitive advantage Internal Analysis Tells us: • what the firm should do, given the relative strengths and weaknesses of resources and capabilities VRIO Framework Helps Managers Recognize Sources of Competitive Advantage