6 internal environment scanning


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6 internal environment scanning

  1. 1. 10/7/2013 Outcomes from External and Internal Environmental Analyses Internal Environment Scanning Examine competitors, opportunities and threats Company Situation Analysis: The Key Questions 1. How well is firm’s present strategy working? 2. What are the firm’s resource strengths and weaknesses vis-à-vis external opportunities and threats? Examine unique resources, capabilities, and competencies How Well is the Present Strategy Working? • Best indicators of a well-conceived, wellexecuted strategy: – The company is achieving its stated financial and strategic objectives. 3. Are the firm’s prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition? – The company is an above-average industry performer. 4. Is the firm competitively stronger or weaker than key rivals? 5. What strategic issues does the firm face? How Well is the Present Strategy Working? • Quantitative – – – – – – – Sales growth – faster / slower Market share – growing / declining Retaining old customers, acquiring new customers Profits increasing / decreasing Credit rating Image and reputation Shareholder value • Qualitative – Completeness, internal consistency, rationale and relevance Indicators of Strategic Success • • • • • • Growth in firm’s sales and market share Acquisition and retention of customers Increasing profit margins, net profits and ROI Growing financial strength and credit rating Positively viewed by shareholders and customers Leadership in factors relevant to marketindustry success • Continuing improvement in operating performance 1
  2. 2. 10/7/2013 Make Meaningful Comparisons SWOT Potential Resource Strengths • Comparison with past performance – Trend analysis – Where are you relative to the past. – Stages of Industry Evolution • Emergence, Growth, Maturity and Decline • Strengths or competencies needed at each stage are different – Benchmarking with the competitors • Key competitors • Best practices irrespective of industry SWOT Analysis Potential Resource Weaknesses • Powerful strategy • Strong financial condition • Strong brand name image/reputation • No clear strategic direction • Obsolete facilities • Weak balance sheet; excess debt • Serving additional customer groups • Expanding to new geographic areas • Expanding product line • Widely recognized market leader • Proprietary technology • Cost advantages • Higher overall costs than rivals • Missing some key skills/competencies • Subpar profits • Internal operating problems . . . • Vertical integration • Acquisition of rivals • Alliances or JVs to expand coverage • Strong advertising • Product innovation skills • Good customer service • Better product quality • Alliances or JVs Potential External Opportunities • Openings to exploit new technologies • Falling behind in R&D • Too narrow product line • Weak marketing skills Potential External Threats • Entry of potent new competitors • Loss of sales to substitutes • Slowing market growth • Adverse shifts in exchange rates & trade policies • Costly new regulations • Vulnerability to business cycle • Growing leverage of customers or suppliers • Reduced buyer needs for product • Demographic changes SWOT Analysis • Draw conclusions from the SWOT listings about the firm’s overall situation. Identify Draw Conclusions Translate into Strategic Action • Translate these conclusions into strategic actions by the firm that: – Match its strategy to its internal strengths and to market opportunities. – Correct important weaknesses, and defend it against external threats. SWOT Analysis How Strong is the Company’s Competitive Position? • How firm ranks relative to key rivals on each industry KSF and relevant measure of competitive strength • Whether firm has a sustainable competitive advantage or finds itself at disadvantage relative to certain rivals • Ability of firm to defend its position in light of – Industry driving forces – Competitive pressures – Anticipated moves of rivals 2
  3. 3. 10/7/2013 Assessing a Company’s Competitive Strength versus Key Rivals 1. List industry key success factors and other relevant measures of competitive strength 2. Rate firm and key rivals on each factor using rating scale of 1 to 10 3. Decide whether to use a weighted or unweighted rating system (a weighted system is usually superior because the chosen strength measures are unlikely to be equally important) 4. Sum individual ratings to get an overall measure of competitive strength for each rival 5. Determine whether firm enjoys a competitive advantage or suffers from a competitive disadvantage based on the overall strength ratings Strategic Implications of Competitive Strength Assessment • The higher a firm’s overall weighted strength rating, the stronger its overall competitiveness versus rivals. • The rating score indicates the total net competitive advantage for a firm relative to other firms. • Firms with high competitive strength scores are targets for benchmarking. • The ratings show how a company compares against rivals, factor by factor (or capability by capability). MCKINSEY 7-S FRAMEWORK • Strength scores can be useful in deciding what strategic moves to make. McKinsey 7-S Framework • The 7-S framework of McKinsey is a Value Based Management (VBM) model that describes how one can holistically and effectively organize a company. Together these factors determine the way in which a corporation operates. Structure Strategy Systems Shared values Style Skills Staff 3
  4. 4. 10/7/2013 The McKinsey 7S model involves seven interdependent factors which are categorized as either "hard" or "soft" elements: Hard Elements Soft Elements Strategy Structure Shared Values Skills Style Staff Systems "Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems. Shared Values • • • • The interconnecting center of McKinsey's model What the organization stands for and what it believes in. Central beliefs and attitudes. Shared Values are guiding concepts - they are a set of values and aspirations (often unwritten) that go beyond the conventional formal statement of objectives • Shared Values are the fundamental ideas around which a business is built, they are its main values. Staff who can identify and abide by these core values are very often the ones who have successful career paths. "Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful. Shared Values • Shared Values link with ‘organisational culture’: – The collection of traditional values, policies, beliefs and attitudes that constitute a pervasive context for everything that is done and thought and taught in organisations. • They also link to what is termed ‘organisational climate’: – Prevailing atmosphere surrounding the organisation, – Level of morale, and the strength of feeling or belonging, care and goodwill among members. – Perceptions of members towards the organisation. Strategy • Plans for the allocation of a firms scarce resources, over time, to reach identified goals. Environment, competition, customers. • Strategy relates to those actions that an organisation plans, in response to or anticipation of change in its external environment: – Its Clients and its Competitors • Strategy is the way an organisation aims to improve its position in relation to its competitors through • • • Structure • The way the organization's units relate to each other: centralized, functional divisions (top-down); decentralized (the trend in larger organizations); matrix, network, etc. • The pattern of relationships among positions in the organisation and among members of the organisation. • It makes possible the application of the process of management and creates a framework of order and command through which activities of the organisation can be planned, organised, directed and controlled low cost delivery or production providing better value to clients achieving sales and service dominance Structure • The challenge lies not so much in comprehending all the dimensions of organisational structure but in developing: – the ability to focus on those dimensions that are currently important to the organisation’s evolution – being ready to refocus as the crucial elements in the business environment shift • The central problem with structuring an organization is not the one on which most organizational designers spend their time - ‘how to divide up tasks !’ • It is one of emphasis and co-ordination - ‘how to make the whole thing work !’ 4
  5. 5. 10/7/2013 System • • The procedures, processes and routines that characterize how important work is to be done: financial systems; hiring, promotion and performance appraisal systems; information systems. Systems are the day-to-day procedures, formal and informal, that make the organisation function and they include: – – – – – – – • • Ordering systems Production procedures Deliver procedures Capital budgeting procedures Training systems Cost accounting procedures Budgeting systems, etc. Structure Vs Systems • Structure enhances power – And therefore authority • Systems dilute power – And therefore authority If you want to understand how an organisation does or doesn’t get things done? Look at its systems If you want to change an organisation without disruptive restructuring Try changing its systems • Systems when they get old, crystallize into structure • Systems provide the dynamic connection between two structures • Therefore are also change resistant! Staff Style • Numbers and types of personnel within the organization. • At the hard end of the spectrum • Cultural style of the organization and how key managers behave in achieving the organization’s goals. • The ‘Style’ of an organisation is very much founded in its Managerial Style • Staff may listen to what managers say, but they believe what managers do. • You will not sell to the clients what you cannot sell to the staff. – Appraisal systems – Pay scales – Formal training programmes • And at the soft end we talk about: – – – – Morale Attitude Motivation Behaviour Skill • Distinctive capabilities of personnel or of the organization as a whole. • Core Competences. • We characterise companies not by their strategies or structures but by what they can do best. • Examples – – – – McDonalds: efficiency and consistency Microsoft: innovation Du Pont:research and new products Intel: precision RESOURCE BASED APPROACH 5
  6. 6. 10/7/2013 Components of Internal Analysis Resources, Capabilities and Core Competencies • Resources – The source of a firm’s capabilities – Cover a spectrum of individual, social and organizational phenomena – Alone, may not yield a competitive advantage Resources • Tangible resources Tangible Resources • Intangible resources – Financial resources – Human resources – Physical resources – innovation resources – Technological resources Financial Resources – Reputation resources – Organizational resources Organizational Resources Physical Resources Technological Resources Intangible Resources Human Resources •Knowledge •Trust •Managerial capabilities •Organizational routines •Culture Intangible resources are more likely than tangible resources to produce competitive advantage Innovation Resources •Ideas •Scientific capabilities •Capacity to innovate Reputational Resources •Reputation with customers •Brand name •Perceptions of product quality, durability, and reliability •Reputation with suppliers •Efficient, effective, supportive, and mutually beneficial interactions and relationships •The firm’s borrowing capacity •Ability to generate internal funds The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems •Sophistication and location of a firm’s plant and equipment •Access to raw materials Stock of technology, such as patents, trade-marks, copyrights Resources, Capabilities and Core Competencies • Capabilities – The firm’s ability to use its resources effectively – 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 – Based on developing, carrying and exchanging information and knowledge through the firm’s human capital 6
  7. 7. 10/7/2013 Capabilities • The foundation of many capabilities lies in: Examples of Firms’ Capabilities • Capabilities are often developed in specific functional areas or as part of a functional area Resources, Capabilities and Core Competencies • 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 Core Competencies • A core competency should: – Contribute significantly to the end product benefits – Be difficult for competitors to imitate • Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies Capabilities Distribution Effective use of Logistics Management Techniques Human Resources Motivating, empowering and retaining employees Management Information Systems Effective and efficient control of inventories through point of purchase data collection methods Marketing Effective promotion of brand name products Effective customer service Management Effective organizational structure Manufacturing Miniaturization of components and products Design and product quality Low-cost manufacturing Research & development – The unique skills and knowledge of a firm’s employees – The functional expertise of those employees Functional Areas Rapid transformation of technology into new products and processes Continuous innovation 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 • Collective learning or co-ordination skills behind a firm’s product lines Core Competencies • A Competence – Is an activity that a firm has learned to perform with proficiency—a capability. • A Core Competence – Is a proficiently performed internal activity that is central to a firm’s strategy and competitiveness. • A Distinctive Competence – Is a competitively valuable activity that a firm performs better than its rivals. 7
  8. 8. 10/7/2013 Competitive Advantage Sustainable Competitive Advantage Valuable Capabilities Rare Capabilities Costly-to-Imitate Capabilities Nonsubstitutable Capabilities VRIO Framework Sustainable Competitive Advantage • Value: Does it provide customer value and competitive advantage? • Rareness: Do other competitors posses it? Imitability: Is it costly for others to imitate? Help a firm neutralize threats or exploit opportunities Offsetting the cost of acquiring resources and capabilities Are not possessed by many others Historical: A unique and a valuable organizational culture or brand name Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers No strategic equivalent • Durability: depreciation rate of the firm’s resources, capabilities, or core competencies – Examples: Intel, cassette tapecdmp3mp4 Imitability: duplication rate by others – Transparency: speed of other firms in understanding the relationship of resources and capabilities supporting a successful firm’s strategy – Transferability: competitors ability to get the resources and capabilities necessary for the competitive challenge – Replicability: competitors duplication ability, the use of resources and capabilities to imitate the firm’s success Explicit knowledge vs. Implicit knowledge Which one is easier to copy? Organization: Is the firm organized to exploit the resource? A Resource-based Approach to Strategy Analysis Select a strategy which best exploits the firm's resources and capabilities relative to external opportunities. Strategy Appraise the rent-generating potential of resources and capabilities in terms of: i) their potential for sustainable competitive advantage, and ii) the appropriability of their returns Competitive Advantage Identity the firm's capabilities: What can the firm do more effectively than its rivals? Identify the resources inputs to each capability, and the complexity of each capability. Capabilities Identify and classify the firm's resources. Appraise strengths and weaknesses relative to competitors. Identify opportunities for better utilization of resources. Resources Identify resource gaps which need to be filled. Invest in replenishing, augmenting and upgrading the firm's resource base The Resource-Based View of a Winning Strategy • Develop resources and capabilities which are rare, valuable, non-tradeable, that form the basis of the core competencies of the firm • Make those resulting advantages sustainable by precluding imitation or substitution from competitors • Ensure efficient use of resources • Make sure that the implementation process is done in such a way that its associated costs do not upset the resulting benefits. 8
  9. 9. 10/7/2013 Cautions and Reminders • Never take for granted that core competencies will continue to provide a source of competitive advantage • Core competencies may become “core rigidities” • Determining what the firm can do through continuous and effective analyses of its internal environment increases the likelihood of long-term competitive success Strategic Cost Analysis • Focuses on a firm’s costs relative to its rivals • Compares a firm’s costs activity by activity against costs of key rivals – Raw materials purchase to production to price paid by ultimate customer • Pinpoint which internal activities are a source of cost advantage or disadvantage • A company’s cost competitiveness depends on how well it manages its value chain relative to how well competitors manage their value chains Are the Company’s Prices and Costs Competitive? • Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis • Key analytical tools – Strategic cost analysis – Value chain analysis – Benchmarking Strategic Advantage Profile (SAP) • Five functional areas in most of the organizations. – Production or Operation – Finance or Accounting – Marketing or Distribution – Human Resource & Corporate Planning – Research & Development • Identify their relative strength and weakness Benchmarking • Involves improving a firm’s internal activities based on learning other companies’ “best practices.” • Assesses whether the cost competitiveness and effectiveness of a firm’s value chain activities are in line with its competitors’ activities. • Sources of Benchmarking Information – Reports, trade groups, analysts and customers – Visits to benchmark companies – Data from consulting firms VALUE CHAIN ANALYSIS 9
  10. 10. 10/7/2013 Value Chain Analysis The Basic Value Chain • Value chain – The chain consists of a series of activities that create and build value. – They culminate in the total value delivered by an organization. – a systematic approach to examining the development of competitive advantage. – VCA disaggregates a business into sets of activities • Primary Activities – Inbound logistics --- Operations ---Outbound logistics ---- marketing and Sales and service • Support activities – General Administration, HRM, R&D, Systems Development Value Chain Analysis • Primary activities involved with: – A product’s physical creation – A product’s sale and distribution to buyers – The product’s service after the sale • Support activities – Provide the support necessary for the primary activities to take place The Value-Creating Potential of Primary Activities • Marketing and sales – Activities completed to provide means through which customers can purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.) – all of the activities associated with attracting and keeping customers for your products • Service – Activities designed to enhance or maintain a product’s value (repair, training, adjustment, etc.) Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent or inferior The Value-Creating Potential of Primary Activities • Inbound logistics – Activities used to receive, store, and disseminate inputs to a product (materials handling, warehousing, inventory control, etc.) • Operations – Activities necessary to convert the inputs provided by inbound logistics into final product form (machining, packaging, assembly, etc.) • Outbound logistics – Activities involved with collecting, storing, and physically distributing the product to customers (finished goods warehousing, order processing, etc.) Primary Activities and Factors for Assessment Inbound Logistics • Soundness of material and inventory control systems • Efficiency of raw material warehousing activities Operations Outbound Logistics Marketing & Sales Customer Service • Productivity of equipment compared to that of key competitors • Appropriate automation of production processes • Effectiveness of production control systems to improve quality and reduce costs • Efficiency of plant layout and workflow design • Timeliness and efficiency of delivery of finished goods and services • Efficiency of finished goods warehousing activities • Effectiveness of market research to identify customer segments & needs • Innovation in sales & promotion • Evaluation of alternate distribution channels • Competence of sales force • Development of image of quality and a favorable reputation • Extent of brand loyalty among customers • Extent of market dominance within the market segment or overall market • Means to solicit customer input for product improvements • Promptness of attention to customer complaints • Appropriateness of warranty and guarantee policies • Quality of customer education and training • Ability to provide replacement parts and repair service 10
  11. 11. 10/7/2013 The Value-Creating Potential of Supporting Activities The Value-Creating Potential of Supporting Activities • Firm’s infrastructure • Procurement – Activities completed to purchase the inputs needed to produce a firm’s products (raw materials and supplies, machines, laboratory equipment, etc.) • Technological development – Activities completed to improve a firm’s product and the processes used to manufacture it (process equipment, basic research, product design, etc) • Human resource management – Activities involved with recruiting, hiring, training, developing, and compensating all personnel – Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.) – Establishment of accounting practices, management information systems, compliance with environmental regulations, tracking and reporting for government programs, – Effectively and consistently identify external opportunities and threats – Identify resources and capabilities – Support core competencies Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent or inferior Secondary Activities and Factors for Assessment Firm Infrastructure • • • • • Capability to identify new product market opportunities and potential environmental threats Quality of the strategic planning system to achieve corporate objectives Coordination and integration of all value chain activities Ability to obtain relatively low cost funds for capital expenditures and working capital Timely & accurate information on general and competitive environments Human Resource • • • • Effectiveness of procedures for recruiting, training, and promoting all levels of employees Appropriateness of reward systems Relations with trade unions Levels of employee motivation and job satisfaction Technology Development • • • • • Success of R&D activities in leading to product and process innovations Quality of working relationship between R&D personnel and other departments Timeliness of technology development activities in meeting critical deadlines Qualifications & experience of laboratory technicians and scientists Ability of work environment to encourage creativity and innovation Procurement • • • • Development of alternate sources for inputs to minimize dependence on a single supplier Procurement of raw materials on timely basis at lowest possible cost and at acceptable levels of quality Development for criteria for lease-vs.-buy decisions Good, long-term relationships with suppliers The Result of the Value Chain Value Chain Analysis • How to do a VCA – Identify key activities – Allocate costs to each activity – Identify the activities that differentiate the firm – Examine the Value Chain • Different activities may be important – industry and strategy • Importance of activities can vary based on a company position in a larger scheme of activities Internal Value Chain for a Hospital • Margins – Capture the value from performing value-creating activities as cheaply as possible – The basic idea is that the consumer is willing to pay a certain amount for the value you create. This is depicted as the size of the overall pentagon. – The size of the individual activity boxes represents the cost of performing those particular activities. – Thus, the smaller the size of the individual activity boxes relative to the value the consumer is willing to pay, the greater the MARGIN will be for the firm. Financial Management, Payer Contracting, Billing Governance, Stakeholder and Public Relations Medical Research, Medical Student Training Legal, Compliance, Patient Advocacy, Patient Satisfaction SUPPLIERS (Physicians, MCOs) Marketing and Promotion ER, Admitting, and Patient Intake Tests, Diagnosis, Treatment, and Referral Discharge Planning, Rehab/ LTC Referral Referral and Follow-Up CUSTOMERS (Patients, payers, employers) Facilities, Security, Maintenance, Housekeeping Clinical, Financial, and Managemant Information Systems (EMR, CPOE) Human Resource Management, Medical Staff Relations, Nurse Recruiting Risk Management, Case Management, Quality Assurance 11
  12. 12. 10/7/2013 Value Chain System for an Entire Industry Supplier Value Chains Activities, Costs, & Margins of Suppliers A Company’s Own Value Chain Internally Performed Activities, Costs, & Margins Forward Channel Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Buyer or End User Value Chains The Buyer’s Value Chain • A firm’s differentiation stems from how its value chain relates to its buyer’s chain. • Differentiation derives fundamentally from creating value for the buyer through a firm’s impact on the buyer’s value chain. • Value is created when a firm creates a competitive advantage for its buyer. • The buyer must perceive the value to pay a premium price. Linkages with Supplier Value Chain • Linkages between suppliers’ value chains and a firms chain provide opportunities for the firm to enhance competitive advantage. • Division of benefits between firm and its suppliers is a function of supplier’s bargaining power and reflecting in supplier’s margins. • Both coordination with suppliers and hard bargaining are important to competitive advantage. Outsourcing • The purchase of a value-creating activity from an external supplier • A firm may outsource all or only part of one or more primary and/or support activities. 12
  13. 13. 10/7/2013 Forces Driving Outsourcing Strategic Rationales for Outsourcing • Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities • Improve business focus – Lets a company focus on broader business issues by having outside experts handle various operational details – By forming and emphasizing fewer capabilities a firm can concentrate on those areas in which it can create value • Provide access to best capabilities – Specialized resources of service providers makes best capabilities available to firms in a wide range of applications – Specialty suppliers can perform outsourced activities more efficiently Strategic Rationales for Outsourcing Core vs Context • Frees resources for other purposes – Redirects efforts from non-core activities toward those that serve customers more effectively • Sharing risks – Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities • • • • • Reduce and control operating costs Make capital funds available Gain access to world class capabilities Resources are not available internally Function difficult to manage Outsourcing Issues Outsourcing Issues • Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity • Do not outsource activities in which the firm itself can create and capture value • Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks • Do not outsource capabilities that are critical to the firm’s success, even though the capabilities are not actual sources of competitive advantage • Do not outsource activities that stimulate the development of new capabilities and competencies 13
  14. 14. 10/7/2013 Outsourcing Risks Outsourcing Costs Outsourcing – Organizational Complexity Other Internal Issues • Organizational Structure: Specialization, control, command, decision, communication flow • Corporate culture: identity, commitment, stability, and employee behavior • Marketing: positioning, segmentation, product life cycle, marketing mix, brand • Financial: financial leverage, capital budgeting • R&D: R&D intensity(% R&D spending), patent, publication, new product, technology transfer, technology discontinuity • HR: teams, temporary workers, quality of life and diversity 14