Chapter 04 Evaluating a Company’s Internal Environment.pptx

Chapter
Four
Internal
Analysis:
Distinctive
Competencies,
Competitive
Advantage,
and
Profitability

4–2
1. Learn how to assess how well a company’s strategy is working.
2. Identify the roots of competitive advantage.
3. Discover how to assess the company’s strengths and
weaknesses.
4. Grasp how a company’s value chain activities can affect the
company’s cost structure and customer value proposition.
5. Understand building blocks of competitive advantage.
6. Understand why a company may fail.
7. Understand how to avoid a company’s failure.

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 3
Internal Analysis includes an assessment of:
 Assessing the company’s present strategy
 Assessing the company’s resources and capabilities
 Evaluating the company’s weaknesses
 Ways of building Competitive Advantage
Internal Analysis
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.

Internal Analysis
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.

FIGURE 4.1 Identifying the Components of a Single-Business Company’s Strategy
4–5

SPECIFIC INDICATORS OF
STRATEGIC SUCCESS
 Growth in a firm’s sales and market share
 Acquisition and retention of customers
 Strengthening image and reputation with customers
 Increasing net profits and ROI
 Growing financial strength and credit rating
4–6

SPECIFIC INDICATORS OF
STRATEGIC SUCCESS
 Gaining leadership in factors relevant to buyers’
choices (such as, price, product quality,
innovative features, delivery time, and customer
service)
 Improvement in key measures of operating
performance (such as inventory handing,
employee productivity, unit cost, defect rate,
delivery time, order accuracy, warranty costs,
etc.)
4–7

Key Financial
Ratios
TABLE 4.1
4–8

STRATEGIC MANAGEMENT PRINCIPLE
♦ Sluggish financial performance and second-
rate market accomplishments almost always
signal weak strategy, weak execution, or both.
4–9
(EBIT)
(EBT)

STRATEGIC MANAGEMENT PRINCIPLE

The Roots of Competitive
Advantage
 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

Identifying a Company’s
Internal Strengths and the Roots of
Competitive Advantage
Figure 3.1

Distinctive Competencies
Competitive advantage arises from the distinctive
competencies.
Distinctive competencies are firm-specific
strengths that allow a company to differentiate its
products from those offered by rivals, and/or
achieve substantially lower costs than its rivals.
Distinctive competencies arise from two
complementary sources:
 Resources, and
 Capabilities

Identifying Resources
Tangible Resources
Physical Resources:
Land and real estate; manufacturing plants,
equipment, and/or distribution facilities; the locations
of stores, plants, or distribution centers, including the
overall pattern of their physical locations; ownership
of or access rights to natural resources (such as
mineral deposits)
Financial Resources:
Cash and cash equivalents; marketable securities;
other financial assets such as a company’s credit
rating and borrowing capacity

Tangible Resources
Technological assets: production technology,
innovation technologies, technological processes
Organizational resources: IT and
communication systems (satellites, servers,
workstations, etc.); the company’s organizational
design and reporting structure; control System

Intangible Resources
Human assets and intellectual capital:
The education, experience, knowledge, and
talent of the workforce; cumulative learning;
and tacit knowledge of employees; know-
how; the knowledge of key personnel
concerning important business functions;
managerial talent and leadership skill; the
creativity and innovativeness of certain
personnel, etc.
4–16

Intellectual Properties
Patents, copyrights, trademarks, and trade
secrets
Brands, company image, and reputational
assets:
Brand names, product or company image,
buyer loyalty and goodwill; company
reputation for quality, service, and reliability;
reputation with suppliers and partners for fair
dealing
4–17

Relationships:
Alliances, joint ventures, or partnerships that
provide access to technologies, specialized
know-how, or geographic markets; networks of
dealers or distributors; the trust established with
various partners
Company culture:
Organizational culture; motivation level of the
employees
4–18

Identifying Capabilities
 An Organizational Capability
● Is the capacity of a firm to perform a critical activity
proficiently using its resources.
● A company’s skills at coordinating its resources and
putting them in productive use.
4–19

Resources, Capabilities, and Competencies
 A company may have firm-specific and valuable
resources, but unless it also has the capability
to use those resources effectively, it may not be
able to create a distinctive competency.
 Additionally, it is important to recognize that a
company may not need firm-specific and
valuable resources to establish a distinctive
competency so long as it has capabilities that
no other competitor possesses.
4–20

The Role of Strategy
 Distinctive competencies shape the strategies,
which lead to competitive advantage and
superior profitability.
 However, it is also very important to realize that
the strategies can build new resources and
capabilities or strengthen the existing resources
and capabilities of the company, thereby
enhancing the distinctive competencies of the
enterprise.
4–21

VRIN TESTING:
RESOURCES AND CAPABILITIES
 Identifying the firm’s resources and capabilities
by testing the competitive power of its
resources and capabilities:
● Is the resource (or capability) Valuable?
● Is the resource Rare—is it something rivals lack?
● Is the resource hard to copy (Inimitable)?
● Is the resource invulnerable to the threat of
substitution from different types of resources and
capabilities (Non-substitutable)?
4–22

IDENTIFYING A FIRM’S WEAKNESSES
AND COMPETITIVE DEFICIENCIES
 A Weakness (Competitive Deficiency)
● Is something that a firm lacks or does poorly (in
comparison to others) or a condition that puts it
at a competitive disadvantage in the marketplace.
 Types of Weaknesses:
● Inferior skills, expertise, or intellectual capital
● Deficiencies in physical, organizational, or intangible
assets
● Missing or competitively inferior capabilities
in key areas
4–23

SWOT ANALYSIS
♦ Simply making lists of a company’s strengths,
weaknesses, opportunities, and threats is not
enough; the payoff from SWOT analysis
comes from the conclusions about a
company’s situation and translating these
conclusions into strategic actions.
4–24

WHAT DO SWOT LISTINGS REVEAL?
 SWOT Analysis Involves:
● Drawing conclusions from the SWOT listings
about the firm’s overall situation.
● Translating 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.
4–25

TABLE 4.3 What to Look for in Identifying a Firm’s Strengths,
Weaknesses, Opportunities, and Threats
4–26

TABLE 4.3 What to Look for in Identifying a Firm’s Strengths,
Weaknesses, Opportunities, and Threats (cont’d)
4–27

Competitive Advantage,
Value Creation, and Profitability
1. VALUE or UTILITY the customer gets from
owning the product
2. PRICE that a company charges for its
products
3. 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.
How profitable a company becomes
depends on three basic factors:

Value Creation per Unit
Figure 3.2
U

Value Creation
and Pricing Options
There is a dynamic
relationship among utility,
pricing, demand, and costs.
Figure 3.3

The Value Chain
A company is a chain of activities for transforming
inputs into outputs that customers value –
including the primary and support activities.
Figure 3.5

Research and Development
R&D activities are directed toward the innovation,
introduction, improvement, and design of
products, services and processes.
Many service companies also undertake R&D.
For example, banks try to develop new financial
products and new ways of delivering those
products to customers, such as online banking
and smart debit cards.

Research and Development
R&D can create superior product design,
increase functionality and attractiveness of
products, thereby adding value.
Moreover, R&D can develop more efficient
production system, thereby lowering production
cost.

Production
Production is concerned with the creation of a
good or service.
For physical products, this generally means
manufacturing.
For services such as banking or retail operations,
“production” typically takes place while the service
is delivered to the customer, as when a bank
makes a loan to a customer.

Production
By performing its activities efficiently, the
production function of a company helps to lower
its cost structure.
The production function can also perform its
activities in a way that is consistent with high
product quality, which leads to differentiation (and
higher value).

Marketing and Sales
Through branding, advertising, and effective
distribution system, the marketing function can
increase the value that customers perceive to be
contained in a company’s product.
Marketing and sales can also create value by
discovering customer needs and communicating
them back to the R&D function of the company,
which can then design products that better match
those needs.

Customer Service
In a narrower sense, the role of the service
function is to provide aftersales service and
support.
In a broader sense, customer service is the act
of taking care of the customers’ needs by
providing and delivering professional, helpful,
high-quality service and assistance before, during,
and after the sale of a product or service.
For example, Caterpillar provides a guarantee to
ship spare parts to any location in the world within
24 hours.

Support Activities
Materials Management (Logistics)
Human Resources
Information Systems
Company Infrastructure

Materials Management (Logistics)
The materials-management (or logistics)
function is the process of managing flow of
materials of a firm.
By tightly controlling the flow of component
parts from its suppliers to its assembly
plants, and to the hands of consumers, for
example, Dell has dramatically reduced its
inventory holding costs.

Human Resources
There are a number of ways in which the human
resource function can help an enterprise to create
more value.
This function ensures that the company has the
right combination of skilled people to perform its
value-creation activities effectively.
It is also the job of the human resource function to
ensure that people are adequately trained,
motivated, and compensated to perform their
value-creation tasks.

Information Systems
Information systems are primarily electronic
systems for managing inventory, tracking
productions, tracking sales, pricing products,
selling products, managing human resources,
dealing with customer service inquiries, and so
on.
Dell uses Web-based information systems to
efficiently manage its global logistics network.

Company Infrastructure
Company infrastructure is the companywide
context within which all the other value creation
activities take place:
 organizational structure
 control systems
 Coordination system
 Company’s culture
 top management’s leadership, etc.

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

 Efficiency
 Measured by the quantity of inputs a
company takes to produce a given output:
Efficiency = Outputs / Inputs
 The most common measure of efficiency
is Employee Productivity which refers to
the output produced per employee.
Superior efficiency helps a company
attain a competitive advantage
through a lower cost structure.

 Efficiency
Efficiency and Economies of
Scale
Economies of scale are unit cost
reductions associated with a large scale of
output.
Diseconomies of scale refer to the
increase in unit cost due to an increase in
organizational size or in output.
Diseconomies of scale occur primarily
because of increased bureaucracy
associated with large-scale enterprises and

 Efficiency
Efficiency and Learning
Effects
Learning effects are cost savings that come
from learning by doing. Labor, for example,
learns by repetition how to best carry out a
task.

 Efficiency
Efficiency and the
Experience Curve
The experience curve is a concept that states
that there is a consistent relationship between the
cumulative production quantity of a company and
the cost of production.
The more experience a firm has in producing a
particular product, the lower its costs.

 Efficiency
Efficiency and the
Experience Curve

 Quality
• Reliable and
• Differentiated by attributes (Excellence) that
customers perceive to have a higher value
A product is said to have superior quality
when customers perceive its attributes and/
or reliability as superior to the products of
rivals. For example, Rolex watch.
Superior quality = customer perception
of greater value in a product’s attributes
Form, features, performance, durability, reliability, style, design
Quality products are goods and services that are:

A Quality Map for Automobiles
When customers
evaluate the quality of
a product, they
commonly measure it
against two kinds of
attributes:
1. Quality as Excellence
(Attributes)
2. Quality as Reliability
Product reliability is
defined as the ability of a
product to perform
intended functions
adequately for a specified
period of time.
Figure 3.7

3 | 51
 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.

One of the most famous examples of process
innovation is Henry Ford’s invention of the
world's first moving assembly line.
This process shortened the time necessary to
produce a single vehicle from 12 hours to 90
minutes.

 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, delivery time, order accuracy,
superior design, after-sales service, and technical support
Superior responsiveness to customers
differentiates a company’s products and services
and leads to brand loyalty and premium pricing.
Identifying and satisfying customers’
needs – better than the competitors

Why Companies Fail
 Inertia (IBM)
• Companies find it difficult to change their
strategies and structures
 Prior Strategic Commitments (Symbian)
• Limit a company’s ability to imitate and
cause competitive disadvantage
 The Icarus Paradox (Introduced by Danny Miller)
• A company can become so inner directed based on past
success that it loses sight of market realities
When a company loses its competitive advantage,
its profitability falls below that of the industry.
 It loses the ability to attract customers and generate resources.
 Profit margins and invested capital shrink rapidly.

3 | 55
Avoiding Failure:
Sustaining Competitive Advantage
1. Focus on the Building Blocks of Competitive
Advantage
Develop distinctive competencies and superior performance in:
 Efficiency  Quality
 Innovation  Responsiveness to Customers
2. Institute Continuous Improvement and Learning
Recognize the importance of continuous learning within the organization
3. Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global
competitors
4. Overcome Inertia
Overcome the internal forces that are barriers to change

THANK YOU…………….

Chapter 04 Evaluating a Company’s Internal Environment.pptx

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Chapter 04 Evaluating a Company’s Internal Environment.pptx