Understanding a business in depth is thegoal of internal analysis. A business internalanalysis is similar to a competitor analysis,but it has a greater focus on performanceassessment and is much richer and deeper.It is more detailed because of its importanceto strategy and because much moreinformation is available. The analysis isbased on specific, current information onsales, profits, costs, organizationalstructure, management style, and otherfactors.
FINANCIAL PERFORMANCE-SALES AND PROFITABILITY Internal analysis often starts with an analysis of currentfinancials, measures of sales and profitability. Changes ineither can signal a change in the market viability of a productline and the ability to produce competitively.
Sales and Market Share- A sensitive measure of how costumers regard a product or service can be sales or market share.After all, if the relative value to a customer changes, sales and share should be affected, althoughthere may be an occasional delay caused by market and customer inertia.Profitability- The ultimate measure of a firm’s ability to prosper and survive is its profitability. ROA = profits X sales sales assetsMeasuring Performance: Shareholder Value Analysis- The concept of shareholder value, an enormously influential concept during the past two decades,provides an answer to this question. Each business should earn an ROA (based on a flow of profitsemanating from an investment), that meets or exceeds the costs of capital, which is the weightedaverage of the cost of equity and cost of debt.
PERFORMANCE MEASUREMENT-BEYOND PROFITABILITY One of the difficulties in strategic market management isdeveloping performance indicators that convincingly representlong-term prospects. The temptation is to focus on short-termprofitability measures and to reduce investment in newproducts and brand images that have long-term payoffs.
Figure 7.1 Performance Measures Reflecting Long-term Profitability Customer Satisfaction/ Brand Loyalty Product/Service QualityBrand/Firm Associations CURRENT LONG-TERM Relative Cost PERFORMANCE PROFITS New Product Activity Manager/Employee Capability and Performance
Customer Satisfaction/Brand Loyalty- Perhaps the most important asset of many firms is the loyalty of the customer base. Measures of sales and market share are useful but potentially inaccurate indicators of how customers really feel about a firm.- Guidelines for Measuring Satisfaction and Loyalty1. Problems and causes of dissatisfaction that may motivate customers to change brands or firms should be identified.2. Often the most sensitive and insightful information comes from those who have decided to leave a brand or firm.3. There is a big difference between a brand or firm being liked and the absence of dissatisfaction.4. Measures should be tracked over time and compared with those of competitors.
Product and Service Quality- A product (or service) and its components should be critically and objectively compared both with the competition and with customer expectations and needs.- Product and service quality are usually based on several critical dimensions that can be identified and measured overtime.Brand/Firm Associations- An often overlooked asset of a brand or firm is what customers think of it. What are its associations? What is its perceived quality?- Perceives quality, sometimes very different from actual quality, can be based on experience with past products or services and on quality cues, such as retailer types, pricing strategies, packaging, advertising, and typical customers.- Associations can be monitored by regularly asking customers in focus groups to describe their use experiences and to tell what brand or firms means to them.
Relative Cost- A careful cost analysis of a product (or service) and its components, which can be critical when a strategy is dependent on achieving a cost advantage or cost parity, involves tearing down competitors’ products and analysing their systems in detail. • Sources of Cost Advantage The many routes to cost advantage will be discussed in Chapter 10. They include economies of scale, the experience curve, product design innovations, and the use of no-frills product offering. • Average Costing In average costing, some elements of fixed or semi variable costs are not carefully allocated but instead are averaged over total production.
New Product Activity- One measure of new product innovation is the number of patents awarded.Manager/Employee Capability and Performance- Also key to a firm’s long-term prospects are the people who must implement strategies.- An organization should be evaluated not only on how well it obtains human resources but also how well it nurtures them.
Past and Current Strategies- To understand the bases of past performance and attempt to sort out new options, it is important to be able to make an accurate profile of past and current strategies. Sometimes a strategy has evolved into something very different from what was assumed.- Benchmarking – Comparing the performance of a business component with others is called benchmarking. The goal is to generate specific ideas for improvement, and also to define standards at which to aim.
Strategic Problems- Another relevant and helpful construct is the strategic problem – that is, a problem with strategic implications.- A strategic problem differs from a weakness or liability, which is the absence of an asset (such as good location) or competence (for example, new product introduction skills.Organizational Capabilities/Constraints- The internal organization of a company – its structure, systems, people, and culture – can be an important source of both strengths and weaknesses.- Internal organization can affect the cost and even the feasibility of some strategies. There must be a fit between a strategy and the elements of an organization.
Financial Resources and Constraints- Ultimately, judgements need to be made about whether or not to invest in a business or withdraw cash from it.- A financial analysis to determine probable, actual, and potential sources and uses of funds can help provide an estimate of this ability. A cash flow analysis projects the cash that will be available from operations and depreciation and other assets.Organizational Strengths and Weaknesses- A key step in internal analysis is to identify the strengths and weaknesses of an organization that are based on its assets and competencies. In fact, much of internal analysis is motivated by the need to detect strengths and weaknesses.
In internal analysis, organizational strengths and weaknesses need tobe not only identified, but also related to competitors and the market. Organizational Competitor Strengths and Strengths and Weaknesses Weaknesses Strategic Decision • Strategic Investment • Value Proposition • Assets and Competencies • Functional Strategies and Programs Market Needs, Attractiveness, and Key Success Factors
Business Portfolio Analysis- Business portfolio analysis provides a structured way to evaluate business units on two key dimensions: the attractiveness of the market involved and the strength of the firm’s position in that market.