Internal Analysis


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Internal Analysis

  1. 1. Strategic Management Internal Analysis: Assessing Strengths and Weaknesses
  2. 2. Learning Outline <ul><li>Understand organizational strengths and weaknesses </li></ul><ul><li>Understand the relationship between organizational resources, organizational capabilities, core competencies, and distinctive organizational capabilities </li></ul><ul><li>Understand the Value Chain </li></ul><ul><ul><li>Outsourcing </li></ul></ul><ul><li>How to do an Internal Analysis </li></ul><ul><li>How to evaluate S&Ws </li></ul>
  3. 3. SWOT Analysis Organization Strengths Weaknesses Opportunities Threats
  4. 4. What is an Internal Analysis <ul><li>Identifies and evaluates resources, capabilities, and core competencies </li></ul><ul><li>As such organizations need to understand their </li></ul><ul><ul><li>Strengths are resources that an organization possesses and capabilities that an organization has developed that can be exploited and developed into a sustainable competitive advantage </li></ul></ul><ul><ul><li>Weaknesses are resources and capabilities that are lacking or deficient and prevents an organization from developing a sustainable competitive advantage </li></ul></ul>
  5. 5. The Road to Competitive Advantage Organizational Resources Financial assets Physical assets Human resources Intangible assets Structural-cultural assets Organizational Capabilities Organizational processes and routines Accumulated knowledge Actual work activities Core Competencies Distinctive Organizational Capabilities Competitive Advantage Performance Results
  6. 6. The road to distinctive organizational capabilities Organizational Capabilities Organizational Capabilities • Fundamental building block for developing core competencies • O rganizational processes and routines to get the work done Core Competencies Distinctive Organizational Capabilities Resources Tangible Intangible
  7. 7. The road to distinctive organizational capabilities Organizational Capabilities Organizational Capabilities • Fundamental building block for developing core competencies • O rganizational processes and routines to get the work done Core Competencies <ul><li>Core Competencies </li></ul><ul><li>Fundamental skills and capabilities </li></ul><ul><li>Exploitable by organization </li></ul><ul><li>M ajor value-creating capabilities </li></ul><ul><li>Not a source of competitive advantage </li></ul>Distinctive Organizational Capabilities
  8. 8. Types of Core Competencies <ul><li>After-sale service capability </li></ul><ul><li>Skills in manufacturing a high quality product (BMW) </li></ul><ul><li>System to fill customer orders accurately and swiftly (Amazon; Dell) </li></ul><ul><li>Expertise in integrating multiple technologies to create families of new products (W.L. Gore) </li></ul>
  9. 9. The road to distinctive organizational capabilities Organizational Capabilities Core Competencies Core Competencies • Not a source of competitive advantage • Fundamental skills and capabilities • Exploitable by organization • M ajor value-creating capabilities Distinctive Organizational Capabilities Distinctive Organizational Capabilities • Special and unique capabilities • Distinguish from competitors • Sustainable competitive advantage • Outperform competition
  10. 10. Honda’s Distinctive Capability <ul><li>Expertise in gasoline engine technology and small engine design </li></ul>
  11. 11. Procter & Gamble’s Distinctive Capabilities <ul><li>Superb marketing-distribution skills and R&D capabilities in five core technologies - fats, oils, skin chemistry, surfactants, emulsifiers </li></ul>
  12. 12. From Distinctive capabilities to competitive advantage Distinctive Organizational Capabilities • Contributes to Superior Customer Value • Can Be Used in a Variety of Ways • Is Difficult for Competitors to Imitate
  13. 13. Capabilities vs. Core Competencies vs. Distinctive Capabilities <ul><li>A company capability is the product of organizational learning and experience and represents real proficiency in performing an internal activity </li></ul><ul><li>A core competence is a well-performed internal activity that is central (not peripheral or incidental) to a company’s competitiveness and profitability </li></ul><ul><li>A distinctive Capability is a competitively valuable activity that a company performs better than its rivals </li></ul>
  14. 14. Value Chain Analysis MARGIN MARGIN Support Activities { Procurement Technological Development Human Resource Management Firm Infrastructure Primary Activities { Inbound Logistics Operations Outbound Logistics Marketing and Sales Service
  15. 15. From Value Chain Analysis to Competitive Advantage <ul><li>Sustainable competitive advantage can be created by </li></ul><ul><li>Managing value chain activities better than rivals and/or </li></ul><ul><li>Developing distinctive value chain capabilities to serve customers! </li></ul>
  16. 16. Other types of Internal Analysis <ul><li>Internal audit </li></ul><ul><ul><li>Look at all functional areas and see which are performing well </li></ul></ul><ul><li>Capabilities assessment profile </li></ul><ul><ul><li>Analyze capabilities to identify potential sources of competitive advantage </li></ul></ul>
  17. 17. Appeal of Outsourcing <ul><li>Outsourcing non-critical activities allows a firm to concentrate its energies and resources on those value-chain activities where it </li></ul><ul><ul><li>Can create unique value </li></ul></ul><ul><ul><li>Can be best in the industry </li></ul></ul><ul><li>Advantages to outsourcing </li></ul><ul><ul><li>Decrease internal bureaucracies </li></ul></ul><ul><ul><li>Flatten organization structure </li></ul></ul><ul><ul><li>Provide firm with heightened strategic focus </li></ul></ul>
  18. 18. Potential Advantages of Outsourcing Non-Critical Activities Outsourcing makes strategic sense when outsiders can perform certain activities at a lower cost and/or with higher value-added.
  19. 19. How do you do an internal analysis? Step 1 Step 2 Step 3 Step 4 Step 5 Prepare current product-market profile. Identify sources of competitive advantage and disadvantage in the main product-market segments. Describe all the organizational capabilities and competencies. Sort the core capabilities and competencies according to strategic importance. Identify and agree on the key capabilities and competencies.
  20. 20. Identify Strategy-Critical Activities <ul><li>Which activities are strategy-critical depends </li></ul><ul><ul><li>Particulars of a firm’s strategy </li></ul></ul><ul><ul><li>Value-chain make-up </li></ul></ul><ul><ul><li>Competitive requirements </li></ul></ul><ul><ul><li>External market conditions </li></ul></ul><ul><li>Identify strategy-critical activities </li></ul><ul><ul><li>What business processes have to be performed extra well or in timely fashion to achieve competitive advantage? </li></ul></ul><ul><ul><li>In what value-chain activities would poor work performance impair strategic success? </li></ul></ul>
  21. 21. Criteria to Judge Organizational Strengths and Weaknesses Are organizational resources and capabilities strengths or weaknesses? Past Performance Trends Specific Goals or Targets Comparison Against Competitors Personal Opinions of Strategic Decision Makers or Consultants
  22. 22. Difficulty in developing competencies <ul><li>Because these competencies are in people </li></ul><ul><ul><li>Hard to develop </li></ul></ul><ul><ul><li>Hard to identify </li></ul></ul><ul><ul><li>Hard to change / improve </li></ul></ul><ul><ul><li>Also hard to “steal” </li></ul></ul><ul><ul><ul><li>Social Complexity </li></ul></ul></ul><ul><ul><ul><li>Historical </li></ul></ul></ul><ul><ul><ul><li>Casually ambiguous </li></ul></ul></ul>
  23. 23. Take Aways <ul><li>Internal Analysis tells what a firm CAN do </li></ul><ul><li>Goal is to create core competencies and distinctive capabilities </li></ul><ul><ul><li>Without them, you will not be in business long </li></ul></ul><ul><ul><li>Creating distinctive capabilities takes time </li></ul></ul><ul><ul><li>Very hard to do…Even harder to “steal” </li></ul></ul><ul><li>Value chain analysis a way to </li></ul><ul><ul><li>Understand where the competencies lie </li></ul></ul><ul><ul><li>Think about outsourcing </li></ul></ul>