Lect 3 internal-analysis

3–3
External Analyses’ OutcomesExternal Analyses’ Outcomes
By studying the external environment, firmsBy studying the external environment, firms
identify what theyidentify what they might choose to do.might choose to do.
OpportunitiesOpportunities
and threatsand threats

3–4
Internal Analyses’ OutcomesInternal Analyses’ Outcomes
By studying the internal environment,By studying the internal environment,
firms identify what theyfirms identify what they can docan do
Unique resources,Unique resources,
capabilities, andcapabilities, and
competenciescompetencies
((required forrequired for sustainablesustainable
competitive advantagecompetitive advantage))

Components of Internal Analysis Leading toComponents of Internal Analysis Leading to
Competitive Advantage and Strategic CompetitivenessCompetitive Advantage and Strategic Competitiveness

COMPETENCE ANALYSISCOMPETENCE ANALYSIS

CORE COMPETENCECORE COMPETENCE
• Core competenceCore competence isis
defined as thedefined as the
combination of individualcombination of individual
technologies andtechnologies and
production skills thatproduction skills that
underlie a company’sunderlie a company’s
product lines.product lines.

• It should relate to an activity or process thatIt should relate to an activity or process that
inherently underlies theinherently underlies the valuevalue in the product orin the product or
service as perceived by the customer.service as perceived by the customer.
• It should lead to aIt should lead to a level of performancelevel of performance in ain a
product or process which is significantly betterproduct or process which is significantly better
than those of competitors.than those of competitors.
• It should beIt should be robust.robust.
TO ACHIEVE CORETO ACHIEVE CORE
COMPETENCECOMPETENCE

• Distinctive competence is the unique capabilityDistinctive competence is the unique capability
that helps an organization in capitalizing upon athat helps an organization in capitalizing upon a
particular opportunity; the competitive edge itparticular opportunity; the competitive edge it
may give a firm in the marketplace.may give a firm in the marketplace.
• The focus in distinctive competence is onThe focus in distinctive competence is on
exploiting a market opportunity.exploiting a market opportunity.
DISTINCTIVE COMPETENCEDISTINCTIVE COMPETENCE

• Strategic competence is theStrategic competence is the
• competence level required to formulate,competence level required to formulate,
implement and produce results with a particularimplement and produce results with a particular
strategy.strategy.
• It may involve combination or convergence ofIt may involve combination or convergence of
different capabilities.different capabilities.
STRATEGIC COMPETENCESTRATEGIC COMPETENCE

• Threshold competence is the competence levelThreshold competence is the competence level
required just for survival in the market orrequired just for survival in the market or
business.business.
• Companies with threshold competence can overCompanies with threshold competence can over
time, graduate to a higher level of competence.time, graduate to a higher level of competence.
• Continued threshold competence can lead toContinued threshold competence can lead to
closure of business also.closure of business also.
THRESHOLD COMPETTENCETHRESHOLD COMPETTENCE

COMPETENCE VERSUS CAPABILITY: THECOMPETENCE VERSUS CAPABILITY: THE
WALMART STORYWALMART STORY
• ‘‘Everyday low prices’ policyEveryday low prices’ policy
• ‘‘Relentless focus’ onRelentless focus’ on
customer satisfaction.customer satisfaction.
• ‘‘Cross-docking’Cross-docking’
• Installed a private satelliteInstalled a private satellite
communication networkcommunication network
which transmits point-of-salewhich transmits point-of-sale
data on daily basis.data on daily basis.
• Fast and efficientFast and efficient
transportation system.transportation system.
• Stock options and profitStock options and profit
sharing for HRsharing for HR

CAPABILITIES DIFFER FROM CORE COMPETENCES:CAPABILITIES DIFFER FROM CORE COMPETENCES:
THE CASE OF HONDATHE CASE OF HONDA
• Expertise in ‘dealerExpertise in ‘dealer
management’management’
• Skill at ‘productSkill at ‘product
realization’realization’

IMPACT OF CHANGING COMPETENCE ONIMPACT OF CHANGING COMPETENCE ON
REVENUE GROWTHREVENUE GROWTH

COMPETENCES, RESOURCES ANDCOMPETENCES, RESOURCES AND
COMPETITIVE POSITIONSCOMPETITIVE POSITIONS

Competitive AdvantageCompetitive Advantage
• Firms achieve strategic competitiveness andFirms achieve strategic competitiveness and
earn above-average returns when their coreearn above-average returns when their core
competencies are effectively:competencies are effectively:
 Acquired.Acquired.
 Bundled.Bundled.
 Leveraged.Leveraged.
• Over time, the benefits of any value-creatingOver time, the benefits of any value-creating
strategy can be duplicated by competitors.strategy can be duplicated by competitors.

Competitive Advantage (cont’d)Competitive Advantage (cont’d)
• Sustainability of a competitive advantage is aSustainability of a competitive advantage is a
function of:function of:
 The rate of core competence obsolescence due toThe rate of core competence obsolescence due to
environmental changes.environmental changes.
 The availability of substitutes for the coreThe availability of substitutes for the core
competence.competence.
 The difficulty competitors have in duplicating orThe difficulty competitors have in duplicating or
imitating the core competence.imitating the core competence.

The Challenge of Internal AnalysisThe Challenge of Internal Analysis
• Strategic decisions in terms of the firm’sStrategic decisions in terms of the firm’s
resources, capabilities, and core competencies:resources, capabilities, and core competencies:
Are non-routineAre non-routine
Significantly influence the firm’s ability to earnSignificantly influence the firm’s ability to earn
above-average returns.above-average returns.

The Challenge of Internal Analysis (cont’d)The Challenge of Internal Analysis (cont’d)
• To develop and use core competencies,To develop and use core competencies,
managers must have:managers must have:
Self-confidenceSelf-confidence
The capacity to deal with uncertainty andThe capacity to deal with uncertainty and
complexitycomplexity
A willingness to hold people (and themselves)A willingness to hold people (and themselves)
accountable for their workaccountable for their work

Resources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies
• ResourcesResources
 Are the source of a firm’sAre the source of a firm’s
capabilities.capabilities.
 Are broad in scope.Are broad in scope.
 Cover a spectrum ofCover a spectrum of
individual, social andindividual, social and
organizationalorganizational
phenomena.phenomena.
 Alone, do not yield aAlone, do not yield a
competitive advantage.competitive advantage.
Discovering CoreDiscovering Core
CompetenciesCompetencies
ResourcesResources
•TangibleTangible
•IntangibleIntangible
CapabilitiesCapabilities
CoreCore

COST MANAGEMENT, COST COMPETENCES, COSTCOST MANAGEMENT, COST COMPETENCES, COST
EFFICIENCYEFFICIENCY
AND COST EFFECTIVENESSAND COST EFFECTIVENESS

SOURCES OF COST EFFICIENCYSOURCES OF COST EFFICIENCY

THE EXPERIENCE CURVETHE EXPERIENCE CURVE

SOURCES OF COST EFFECTIVENESSSOURCES OF COST EFFECTIVENESS

ResourcesResources
• ResourcesResources
 Are a firm’s assets,Are a firm’s assets,
including people andincluding people and
the value of its brandthe value of its brand
name.name.
 Represent inputs intoRepresent inputs into
a firm’s productiona firm’s production
process, such as:process, such as:
• Capital equipmentCapital equipment
• Skills of employeesSkills of employees
• Brand namesBrand names
• Financial resourcesFinancial resources
• Talented managersTalented managers
• Types of ResourcesTypes of Resources
 Tangible resourcesTangible resources
• Financial resourcesFinancial resources
• Physical resourcesPhysical resources
• TechnologicalTechnological
resourcesresources
• OrganizationalOrganizational
resourcesresources
 Intangible resourcesIntangible resources
• Human resourcesHuman resources
• Innovation resourcesInnovation resources
• Reputation resourcesReputation resources

• CapabilitiesCapabilities
 Represent the capacity to deployRepresent the capacity to deploy
resources that have beenresources that have been
purposely integrated to achieve apurposely integrated to achieve a
desired end statedesired end state
 Emerge over time through complexEmerge over time through complex
interactions among tangible andinteractions among tangible and
intangible resourcesintangible resources
 Often are based on developing,Often are based on developing,
carrying and exchangingcarrying and exchanging
information and knowledge throughinformation and knowledge through
the firm’s human capitalthe firm’s human capital
ResourcesResources
•TangibleTangible
CoreCore

• Capabilities (cont’d)Capabilities (cont’d)
 The foundation of manyThe foundation of many
capabilities lies in:capabilities lies in:
• The unique skills andThe unique skills and
knowledge of a firm’sknowledge of a firm’s
employeesemployees
• The functional expertise ofThe functional expertise of
those employeesthose employees
 Capabilities are oftenCapabilities are often
developed in specificdeveloped in specific
functional areas or as partfunctional areas or as part
of a functional area.of a functional area.
ResourcesResources
•TangibleTangible
CoreCore

• Four criteria forFour criteria for
determining strategicdetermining strategic
capabilities:capabilities:
 ValueValue
 RarityRarity
 Costly-to-imitateCostly-to-imitate
 NonsubstitutabilityNonsubstitutability
ResourcesResources
•TangibleTangible
CoreCore

• Core CompetenciesCore Competencies
 Resources and capabilities thatResources and capabilities that
are the sources of a firm’sare the sources of a firm’s
competitive advantage:competitive advantage:
• Distinguish a companyDistinguish a company
competitively and reflect itscompetitively and reflect its
personality.personality.
• Emerge over time through anEmerge over time through an
organizational process oforganizational process of
accumulating and learningaccumulating and learning
how to deploy differenthow to deploy different
resources and capabilities.resources and capabilities.
ResourcesResources
•TangibleTangible
CoreCore

• Core CompetenciesCore Competencies
 Activities that a firm performsActivities that a firm performs
especially well compared toespecially well compared to
competitors.competitors.
 Activities through which the firmActivities through which the firm
adds unique value to its goodsadds unique value to its goods
or services over a long period ofor services over a long period of
time.time.
ResourcesResources
•TangibleTangible
CoreCore

Building Core CompetenciesBuilding Core Competencies
• Four Criteria ofFour Criteria of
Sustainable CompetitiveSustainable Competitive
AdvantageAdvantage
 Valuable capabilitiesValuable capabilities
 Rare capabilitiesRare capabilities
 Costly to imitateCostly to imitate
 NonsubstituableNonsubstituable
• ValuableValuable
• RareRare
• Costly to imitateCostly to imitate
• NonsubstitutableNonsubstitutable
Four Criteria ofFour Criteria of
SustainableSustainable
AdvantagesAdvantages

Building Sustainable Competitive AdvantageBuilding Sustainable Competitive Advantage
• Valuable capabilitiesValuable capabilities
 Help a firm neutralizeHelp a firm neutralize
threats or exploitthreats or exploit
opportunities.opportunities.
• Rare capabilitiesRare capabilities
 Are not possessed byAre not possessed by
many others.many others.
• RareRare

• Costly-to-Imitate CapabilitiesCostly-to-Imitate Capabilities
 HistoricalHistorical
• A unique and a valuableA unique and a valuable
organizational culture or brandorganizational culture or brand
namename
 Ambiguous causeAmbiguous cause
• The causes and uses of aThe causes and uses of a
competence are unclearcompetence are unclear
 Social complexitySocial complexity
• Interpersonal relationships,Interpersonal relationships,
trust, and friendship amongtrust, and friendship among
managers, suppliers, andmanagers, suppliers, and
customerscustomers
• RareRare
• Costly to ImitateCostly to Imitate

 No strategic equivalentNo strategic equivalent
• Firm-specific knowledgeFirm-specific knowledge
• Organizational cultureOrganizational culture
• Superior execution of theSuperior execution of the
chosen business modelchosen business model
• RareRare

Outcomes from CombinationsOutcomes from Combinations
of the Four Criteriaof the Four Criteria
Valuable?R
are?
C
ostly
to
Im
itate?
N
onsubstitutable?
Competitive
Consequences
Performance
Implications
No No No No Competitive
Disadvantage
Below Average
Returns
Yes No No Yes/
No
Competitive
Parity
Average Returns
Yes Yes No Yes/
No
Temporary Com-
petitive Advantage
Above Average to
Average Returns
Yes Yes Yes Yes Sustainable Com-
petitive Advantage
Above Average
Returns

The Basic ValueThe Basic Value
ChainChain

Value Chain AnalysisValue Chain Analysis
• Allows the firm to understand the parts of itsAllows the firm to understand the parts of its
operations that create value and those that dooperations that create value and those that do
not.not.
• A template that firms use to:A template that firms use to:
 Understand their cost position.Understand their cost position.
 Identify multiple means that might be used to facilitateIdentify multiple means that might be used to facilitate
implementation of a chosen business-level strategy.implementation of a chosen business-level strategy.

Value Chain Analysis (cont’d)Value Chain Analysis (cont’d)
• Primary activities involved with:Primary activities involved with:
 A product’s physical creationA product’s physical creation
 A product’s sale and distribution to buyersA product’s sale and distribution to buyers
 The product’s service after the saleThe product’s service after the sale
• Support ActivitiesSupport Activities
 Provide the assistance necessary for the primaryProvide the assistance necessary for the primary
activities to take place.activities to take place.

Value Chain Analysis (cont’d)Value Chain Analysis (cont’d)
• Value ChainValue Chain
 Shows how a product moves from the raw-materialShows how a product moves from the raw-material
stage to the final customer.stage to the final customer.
• To be a source of competitive advantage, aTo be a source of competitive advantage, a
resource or capability must allow the firm:resource or capability must allow the firm:
 To perform an activity in a manner that is superior toTo perform an activity in a manner that is superior to
the way competitors perform it, orthe way competitors perform it, or
 To perform a value-creating activity that competitorsTo perform a value-creating activity that competitors
cannot completecannot complete

OutsourcingOutsourcing
• The purchase of a value-creating activity from anThe purchase of a value-creating activity from an
external supplierexternal supplier
 Few organizations possess the resources andFew organizations possess the resources and
capabilities required to achieve competitive superioritycapabilities required to achieve competitive superiority
in all primary and support activities.in all primary and support activities.
• By performing fewer capabilities:By performing fewer capabilities:
 A firm can concentrate on those areas in which it canA firm can concentrate on those areas in which it can
create value.create value.
 Specialty suppliers can perform outsourcedSpecialty suppliers can perform outsourced
capabilities more efficiently.capabilities more efficiently.

Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing
• Improving business focusImproving business focus
 Helps a company focus on broader business issuesHelps a company focus on broader business issues
by having outside experts handle various operationalby having outside experts handle various operational
details.details.
• Providing access to world-class capabilitiesProviding access to world-class capabilities
 The specialized resources of outsourcing providersThe specialized resources of outsourcing providers
makes world-class capabilities available to firms in amakes world-class capabilities available to firms in a
wide range of applications.wide range of applications.

Strategic Rationales for Outsourcing (cont’d)Strategic Rationales for Outsourcing (cont’d)
• Accelerating re-engineering benefitsAccelerating re-engineering benefits
 Achieves re-engineering benefits more quickly byAchieves re-engineering benefits more quickly by
having outsiders—who have already achieved world-having outsiders—who have already achieved world-
class standards—take over process.class standards—take over process.
• Sharing risksSharing risks
 Reduces investment requirements and makes firmReduces investment requirements and makes firm
more flexible, dynamic and better able to adapt tomore flexible, dynamic and better able to adapt to
changing opportunities.changing opportunities.
• Freeing resources for other purposesFreeing resources for other purposes
 Redirects efforts from non-core activities toward thoseRedirects efforts from non-core activities toward those
that serve customers more effectively.that serve customers more effectively.

Outsourcing IssuesOutsourcing Issues
• Seeking greatest valueSeeking greatest value
 Outsource only to firms possessing a coreOutsource only to firms possessing a core
competence in terms of performing the primary orcompetence in terms of performing the primary or
supporting the outsourced activity.supporting the outsourced activity.
• Evaluating resources and capabilitiesEvaluating resources and capabilities
Do notDo not outsource activities in which the firm itselfoutsource activities in which the firm itself
can create and capture value.can create and capture value.
• Environmental threats and ongoing tasksEnvironmental threats and ongoing tasks
Do notDo not outsource primary and support activitiesoutsource primary and support activities
that are used to neutralize environmental threats or tothat are used to neutralize environmental threats or to
complete necessary ongoing organizational tasks.complete necessary ongoing organizational tasks.

Outsourcing Issues (cont’d)Outsourcing Issues (cont’d)
• Nonstrategic team resourcesNonstrategic team resources
Do notDo not outsource capabilities critical to the firm’soutsource capabilities critical to the firm’s
success, even though the capabilities are not actualsuccess, even though the capabilities are not actual
sources of competitive advantage.sources of competitive advantage.
• Firm’s knowledge baseFirm’s knowledge base
Do notDo not outsource activities that stimulate theoutsource activities that stimulate the
development of new capabilities and competencies.development of new capabilities and competencies.

Cautions and RemindersCautions and Reminders
• Never take for granted that core competencies willNever take for granted that core competencies will
continue to provide a source of competitive advantage.continue to provide a source of competitive advantage.
• All core competencies have the potential to becomeAll core competencies have the potential to become corecore
rigiditiesrigidities——former core competencies that now generateformer core competencies that now generate
inertia and stifle innovation.inertia and stifle innovation.
• Determining what the firm can do through continuous andDetermining what the firm can do through continuous and
effective analyses of its internal environment will increaseeffective analyses of its internal environment will increase
the likelihood of long-term competitive success.the likelihood of long-term competitive success.

Lect 3 internal-analysis

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