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Chapter 2 internal environmental analysis

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  • 5
  • Discovering Core Competencies Tangible vs. Intangible Resources (pp. 108–111) Resources are what a firm has to work with—its assets—including its people and the value of its brand name. Tangible resources are in essence those things that you can put your hands on such as property, plant and equipment, personnel, raw materials, and so on. One highly illustrative example of tangible resources and how the strategic utilization/manipulation of them can have a great impact on a firm’s profits are diamonds. Cartier owns or controls over 95% of the world’s diamond mines. If the entire supply of diamonds were to be released onto the world market the gems would devalue to 10% of the current market price or less. Cartier controls the amount, timing, quality, grade (size), and destination point of virtually every batch of diamonds that is released on the world market. In doing so Cartier is able to control the market price of the gems and therefore are able to manipulate profits. While the concept of tangible resources is easy to imagine, the idea of intangibles can be elusive. If tangibles are that which we can put our hands on, intangibles are everything else. Some examples are goodwill, reputation, and brand value. For example, the late Robert Goizeuta, former CEO of Coca-Cola, once explained intangibles and their value in this way. (Continued on next slide.)
  • Discovering Core Competencies (cont.) Tangible vs. Intangible Resources (pp. 108–111) (cont.) Goizeuta said if everything tangible that Coke owns were to be destroyed in some bizarre accident, if a fire were to burn down each and every factory, office building and bottling plant right down to a total loss of every desk, chair, and pencil, the intangible resources that Coke owns would be those things that the company still possesses, namely, brand value, the secret recipe, its distribution channels, and business relationships that it has developed over the years. These would allow Coke to go to a bank and borrow billions of uncollateralized dollars to rebuild its infrastructure. The textbook suggests that intangible resources can be categorized: • Human Resources: Knowledge, Trust, Managerial capabilities, Organizational routines • Innovation Resources: Ideas, Scientific capabilities, Capacity to innovate, Intellectual property • Reputational Resources: Reputation with customers, Brand name, Reputation with suppliers, Perceived product quality, durability, and reliability Similar to the Coca-Cola example, the Harley-Davidson brand name has such cachet that it adorns a limited-edition Barbie doll, a popular restaurant in New York City, and a line of L’Oreal cologne. Moreover, Harley-Davidson MotorClothes annually generates over $100 million in revenue for the firm and offers a broad range of clothing items, from black leather jackets to fashions for tots. In sum, because reputation is difficult to imitate and substitute, it can garner competitive advantage.
  • Discovering Core Competencies (cont.) Core Competencies (pp. 112–114) A firm’s core competencies are those things that it does that give it a competitive advantage over another firm. They are generally valuable, rare, costly to imitate, and nonsubstitutable. They may or may not be unique to the firm. They may simply be an industry practice that a firm does better, or a set of industry practices that the firm does in a specific combination or sequence that allows the firm to be more efficient than its competitors. Using the Cartier example, to be able to manipulate the supply of gems in the market, Cartier must be very efficient and competent at predicting the demand for gems. If they were not very skilled at this, there would be fluctuations in the supply and demand curve and, therefore, market price that would leave an opportunity for arbitrage. The value of this arbitrage represents lost profits for Cartier. It was this ability to predict demand that allowed Cartier to see higher profits than its competitors in the 1800s, eventually eroding the market share and profitability of these competitors. Cartier subsequently acquired these firms to create the monopoly it now holds on the world’s diamond market. As noted in the textbook, an important question is “How many core competencies are required for the firm to have a sustained competitive advantage?” While responses to this question vary, McKinsey & Co. recommends that its clients identify no more than three or four competencies. Recent actions by Starbucks demonstrate this point. (Continued on next slide.)
  • Discovering Core Competencies (cont.) Core Competencies (discussed on pp. 112-114) Growing rapidly, Starbucks decided that it could use the Internet as a distribution channel to achieve additional growth. However, the firm quickly realized that it lacked the capabilities required to successfully distribute its products through this channel—and that its unique coffee, not the delivery of that product, is its competitive advantage. In part, this recognition forced Starbucks to renew its emphasis on existing capabilities to create more value through its supply chain. To do so, the firm trimmed the number of its milk suppliers from 65 to fewer than 25 and negotiated long-term contracts with coffee-bean growers. The firm also decided to place automated espresso machines in its busy units. These machines reduced Starbucks’ cost while providing improved service to its customers, who can now move through the line much faster. Using its supply chain and service capabilities in these ways allows Starbucks to strengthen its competitive advantages of coffee and the unique venue in which on-site customers experience it. When capabilities are valuable, rare, costly to imitate, and nonsubstitutable, they are effectively called core competencies. Alternatively, every core competence is a capability, but not every capability is a core competence. Operationally, one could argue that for a capability to be a core competence, it must be valuable and nonsubstitutable from a customer’s point of view, but unique and inimitable from a competitor’s point of view. As discussed in the textbook, an important key to success occurs when the link between the firm’s capabilities and its competitive advantage is causally ambiguous, where rivals can’t tell how a firm uses its capabilities as the foundation for competitive advantage. Gordon Forward, CEO of Chaparral Steel, allows rivals to tour his firm’s facilities and see almost everything. In Chaparral Steel’s causally ambiguous operations, workers use the concept of mentalfacturing , by which manufacturing steel is done by using their minds instead of their hands.
  • Transcript

    • 1. Internal Environmental Analysis HCAD 5390
    • 2. Assessing Organizational Abilityto Make Strategy Analyze historical and current financial performance Review strategic assets – resources and competencies Breakdown and evaluate the internal value chain
    • 3. Historical Financial Performance Sales, market share, and profits Free cash flow External capital sources Capital project hurdle rate Other capital demands Shareholder value
    • 4. Increasing Shareholder Value Achieve existing profits with less capital Increase profits with no additional capital Decrease the cost of equity capital Invest more capital in strategic projects that earn above average rates of return
    • 5. Current Financial Performance Balance sheet Operating or income statement Cash flow statement Statement of changes in owners’ equity (for- profit) or net assets (not-for-profit)
    • 6. Ratio Analysis of Financial Statements- Liquidity Currentratio Average collection period Days cash-on-hand, short-term sources Average payment period
    • 7. Ratio Analysis of Financial Statements- Profitability Operating margin Total margin Return on net assets
    • 8. Ratio Analysis of Financial Statements– Operating Efficiency Totalasset turnover Fixed asset turnover Inventory turnover
    • 9. Ratio Analysis of Financial Statements– Capital Structure Netassets (or equity) to total assets Long-term debt to net assets (or equity) Debt service coverage
    • 10. Non-Financial Operating Indicators fora Hospital Organization Average length of stay Occupancy rate Outpatient revenue as % of total revenue FTE employees per occupied bed
    • 11. External and Internal Analyses Environment Sociocultural By studying the external environment, firms identify mo eral ic Ge omiic Ge Ec ph Eco Industry what they might choose to do ner c ner n gra ono Ge Environment n m all a De me al Opportunities and threats g nt /LeEnEnGll nmen Go Competitor viir vr cal oba ent ball Environment on on l iti o v ir m Po En Technological t General 11
    • 12. External and Internal Analyses By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage) 12
    • 13. Value Creation V-P V=Value to ConsumerV P-C P=Price C=Costs of Production P V-P=Consumer Surplus P-C=Profit Margin C C 13
    • 14. Components of Value Creation Internal Analysis Competitive Core Discovering Core Advantage Competencies Competencies Capabilities Four Criteria ValueResources of Sustainable Chain• Tangible• Intangible Advantages Analysis • Valuable • Outsource • Rare • Costly to Imitate • Nonsubstitutable 14
    • 15. 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? 15
    • 16. Discovering Core Competencies Resources • Tangible • IntangibleResources are what an Resources represent inputs into anorganization has to work organization’s productionwith--its assets--including process... such as capitalits people and the value of equipment, skills of employees,its brand name brand names, finances and talented managers 16
    • 17. Discovering Core Competencies Resources • Tangible • Intangible Tangible Resources Intangible Resources • Financial • Human • Organizational • Innovation • Physical • Reputation • Technological 17
    • 18. Discovering Core Competencies CapabilitiesCapabilities become important when they arecombined in unique combinations which create corecompetencies which have strategic value and canlead to competitive advantage 18
    • 19. 19
    • 20. Discovering Core Competencies CapabilitiesCapabilities are what an organization does, andrepresent the organization’s capacity to deployresources that have been purposely integrated toachieve a desired end state 20
    • 21. Discovering Core Competencies Core CompetenciesCore competencies are resources and capabilities that serve asa source of competitive advantage over rivalsCore competencies distinguish a company competitively andmake it distinctiveMcKinsey and Co. recommends using three to fourcompetencies when framing strategic actions 21
    • 22. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • NonsubstitutableValuable: Capabilities that help an organizationneutralize threats or exploit opportunities 22
    • 23. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • NonsubstitutableRare: Capabilities that are not possessed by manyothers 23
    • 24. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • NonsubstitutableCostly to imitate: capabilities that other organizations cannot develop easily, usually due to• Unique historical conditions• Causal ambiguity• Social complexity 24
    • 25. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • NonsubstitutableNonsubstitutable: capabilities that do not have strategic equivalents• Invisible to competitors• Firm specific knowledge• Trust-based working relationships between managers and nonmanagerial personnel 25
    • 26. Categories of Strategic Resources Tangible (visible, touchable, measurable)  Financial  Organizational  Physical  Technological Intangible (unseen, amorphous)  Human  Creative  Perceptual
    • 27. Competencies Leading to SustainableCompetitive Advantage Valuable to the organization Unique among competitors Difficult or impossible to imitate No substitute competencies
    • 28. Strategic Uses ofResources and Competencies Discovery (did not know we had them) Creation (make or acquire new ones) Combination (use them together) Preservation (maintain them) Concentration (use them for the right purpose)
    • 29. Ma Ma t r rgii gn iit n of of Pr PrPorter’s Generic Internal Value Chain ce ce rvi rvi Se Se g ng tn etii Human Resource Management rke s rk s Ma Sa e Ma Salle Technology Development & & Procurement Procurement nd nd Primary Activities ou ou tb t cs tb tiics Ou g s Ou giis Lo Lo ss on ion ati at er er Op Op d nd un s ou cs bo tiic nb g st IIn giis Lo Lo A C V E S T T I I I O U R S P P T
    • 30. Internal Value Chain for a Hospital
    • 31. Support Activities Hospital Firm Infrastructure Value Chain Human Resource Mgmt. M ar Technological Development gin Procurement M ar gin Pre-Service After-Service Point-of-ServiceService Activities31
    • 32. 32
    • 33. 33
    • 34. How Resources and CompetenciesBecome Competitive advantage Resources and Competencies ↓ are the basis of ↓ Individual Activities ↓ that can be managed to ↓ Reduce Costs or Provide Additional Value ↓ in order to gain ↓ Competitive Advantage
    • 35. 35
    • 36. 36
    • 37. 37
    • 38. 38

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