INTERNAL ANALYSIS: RESOURCES AND CAPABILITIES

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• INTERNAL ANALYSIS RESOURCES AND CAPABILITIES

Reading Requirements 1. Text Chapters 3
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Company Situation AnalysisThe Key Questions

• How well is the firms present strategy working?
• What are the firms resource strengths and
  weaknesses (given its external opportunities and
  threats)?
• Are the firms prices and costs competitive?
• How strong is the firms competitive position
  relative to rivals? (Builds from external
  analysis.)
• What strategic issues does the firm currently
  face?

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Question 1 How Well Is thePresent Strategy
Working?

• Two steps involved
• Determine current strategy of company
• Examine key indicators of strategic and financial
  performance

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What Is the Strategy?

• Identify competitive approach
• Low-cost leadership
• Differentiation
• Focus on a particular market niche
• Determine competitive scope (Broad vs Narrow)
• Stages of industrys production/distribution
  chain
• Geographic coverage
• Customer base
• Identify functional strategies
• Examine recent strategic moves

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Key Indicators of How Wellthe Strategy Is Working

• Trend in market share
• Trend in profit margins
• Trend in net profits and return on investment
• Trend in sales growth
• Credit ranking
• Trend in stock price and stockholder value
• Image and reputation with customers
• Leadership role(s) -- technology, quality, etc.
• Competitive advantages or disadvantages

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How Financial Ratios Differ Across Industries
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Question 2 What Are the Firms Strengths,
Weaknesses, Opportunities and Threats ?

• S W O T represents the first letter in
• Strengths
• Weaknesses
• Opportunities
• Threats
• Strategy-making must be well-matched to both
• A firms resource strengths and weaknesses
• A firms best market opportunities and external
  threats to its well-being

Use Value Chain Analysis and Resource Analysis
(Internal Analysis)
Build from Industry and Competitive Analysis
(External Analysis)
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Identifying Resource Strengthsand Competitive
Capabilities

• A strength is something a firm does well or a
  characteristic that enhances its competitiveness
• Valuable competencies or know-how (Southwest)
• Valuable physical assets (GM)
• Valuable human assets (AG Edwards)
• Valuable organizational assets
• Valuable intangible assets (Coca-Cola)
• Important competitive capabilities (Wal-Mart)
• An attribute that places a company in a position
  of market advantage
• Alliances or cooperative ventures (Nike)

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Tangible Resources
D L
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Intangible Resources (see Chapter 3 text)
D L
Human
Experience and capabilities of employees Trust Man
agerial skills Firm-specific practices and
procedures
Innovation and creativity
Technical and scientific skills Innovation
capacities
Brand name Reputation with customers for quality
and reliability Reputation with suppliers for
fairness, non-zero sum relationships
Reputation
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Identifying Resource Weaknessesand Competitive
Deficiencies

• A weakness is something a firm lacks, does
  poorly, or a condition placing it at a
  disadvantage
• Resource weaknesses relate to
• Deficiencies in know-how or expertise or
  competencies
• Lack of important physical, organizational, or
  intangible assets
• Missing capabilities in key areas

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SWOT Analysis -- What to Look For
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Competencies vs. Core Competencies vs.
Distinctive Competencies

• A competence is an internal activity that a
  company performs better than other internal
  activities.
• A core competence is a well-performed internal
  activity that is central, not peripheral, to a
  companys strategy, competitiveness, and
  profitability.
• A distinctive competence (capability) is a
  competitively valuable activity that a company
  performs better than its rivals.

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Organization Capabilities
D L

• Firm competences or skills the firm employs to
  transfer inputs to outputs
• Capacity to combine tangible and intangible
  resources, using organizational processes to
  attain desired end

Examples

• Outstanding customer service
• Excellent product development capabilities
• Innovativeness of products and services
• Ability to hire, motivate, and retain human
  capital

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Marks Spencer How Resources and Capabilities
Lead to Advantages
D L
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Types of Core Competencies

• Skills in manufacturing a high quality product
• System to fill customer orders accurately and
  swiftly
• Fast development of new products
• Better after-sale service capability
• Superior know-how in selecting good retail
  locations
• Innovativeness in developing popular product
  features
• Merchandising and product display skills
• Expertise in an important technology
• Expertise in integrating multiple technologies to
  create whole families of new products

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A Distinctive Competence -- ACompetitively
Superior Resource

• A distinctive competence is a competitively
  significant activity that a company performs
  better than its competitors
• A distinctive competence represents a
  competitively superior resource strength

• A distinctive competence
• Represents a competitively valuable capability
  that rivals do not have
• Has potential for being a cornerstone of
  strategy
• Can provide a competitive edge in the marketplace

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Examples Distinctive Competencies

• Sharp Corporation
• Expertise in flat-panel display technology
• Toyota, Honda, Nissan
• Low-cost, high-quality manufacturing capability
  and short design-to-market cycles
• Intel
• Ability to design and manufacture ever more
  powerful microprocessors for PCs
• Motorola
• Defect-free manufacture (six-sigma quality) of
  cell phones

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Assessing Sustainability of Resources and
Capabilities Four Criteria
D L
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Criteria for Sustainable Competitive Advantage
and Strategic Implications
D L
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Question 3 Are the CompanysPrices and Costs
Competitive?

• Assessing whether a firms costs are competitive
  with those of rivals is a crucial part of company
  analysis
• Key analytical tool is Value chain analysis

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Why Rival CompaniesHave Different Costs

• Companies do not have the same costs because of
  differences in
• Prices paid for raw materials, component parts,
  energy, and other supplier resources
• Basic technology and age of plant equipment
• Economies of scale and experience curve effects
• Wage rates and productivity levels
• Marketing, promotion, and administration costs
• Inbound and outbound shipping costs
• Forward channel distribution costs

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The Value Chain Concept

• Identifies the separate activities and business
  processes performed to design, produce, market,
  deliver, and support a product / service
• Consists of two types of activities
• Primary activities
• Support activities

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A Typical Company Value Chain
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D L Value Chain
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Primary activities of theVALUE CHAIN

• Inbound Logistics
• Soundness of material and inventory handling
• Efficiency of warehousing activities
• Operations
• Productivity of equipment
• Production processes
• Outbound Logistics
• Efficiency of finished goods delivery
• Marketing and Sales
• Effective market research
• Innovative sales promotion
• Service
• Customer feedback mechanisms
• Customer education and training

• Production control systems
• Layout work-flow design

• Sales force
• Image, brand loyalty

• Warranty, guarantee, repair

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Factors to Consider in Assessing a Firms Primary
Activities
D L
PROFIT MARGIN
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Support activities of theVALUE CHAIN

• Infrastructure
• Physical Size, location, age, flexibility of
  facilities and equipment
• Financial Risk, cost and use of funds, ability
  to raise capital
• Technology Development
• Research and development
• Interaction with other departments
• Technology transfer
• Encourage innovation
• Procurement
• Obtain raw materials
• acceptable quality
• lowest cost
• Supplier relationships
• Human Resources
• Knowledge Types, levels of knowledge possessed
  by employees throughout the firm
• Skills Various categories of skills and
  abilities developed over time

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Factors to Consider in Support Activities

• Effective planning systems to attain overall
  goals and objectives
• Ability of top management to anticipate and act
  on key environmental trends and events
• Ability to obtain low cost funds for capital
  expenditures and working capital
• Excellent relationships with diverse stakeholder
  groups
• Ability to coordinate and integrate activities
  across the value system
• Highly visible to inculcate organizational
  culture, reputation, and values
• Effective recruiting, development, and retention
  mechanisms for employees
• Quality relations with trade unions
• Quality work environment to maximize overall
  employee performance and minimize absenteeism
• Reward and incentive programs to motivate all
  employees
• Effective research and development activities for
  process and product initiatives
• Positive collaborative relationships between RD
  and other departments
• State-of-the art facilities and equipment
• Culture to enhance creativity and innovation
• Excellent professional qualifications of
  personnel
• Ability to meet critical deadlines
• Procurement of raw material inputs to optimize
  quality, speed and minimize the associated costs
• Development of collaborative win-win
  relationships with suppliers

D L
General Administration
PROFIT MARGIN
Human Resource Management
Technology Development
Procurement
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Examples Key Value Chain Activities
PULP PAPER INDUSTRY

• Timber Farming, Logging, Pulp Mills
• Papermaking, Printing Publishing

HOME APPLIANCE INDUSTRY
Parts Components Manufacture, Assembly,
Wholesale Distribution, Retail Sales
SOFT DRINK INDUSTRY
Processing of Basic Ingredients, Syrup
Manufacture, Bottling and Can Filling, Wholesale
Distribution, Retailing
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What Determines Whether a Company Is Cost
Competitive?

• A companys cost competitiveness depends on how
  well it manages its value chain relative to
  competitors
• Three areas contribute to cost differences
• 1. Suppliers activities
• 2. The companys own internal activities
• 3. Forward channel activities

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Correcting Supplier-Related Cost Disadvantages
The Options

• Negotiate more favorable prices with suppliers
• Work with suppliers to help them achieve lower
  costs
• Integrate backward
• Use lower-priced substitute inputs
• Do a better job of managing linkages between
  suppliers value chains and firms own chain
• Make up difference by initiating cost savings in
  other areas of value chain

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Correcting Forward Channel Cost Disadvantages
The Options

• Push for more favorable terms with distributors
  and other forward channel allies
• Work closely with forward channel allies and
  customers to identify win-win opportunities to
  reduce costs
• Change to a more economical distribution strategy
• Make up difference by initiating cost savings
  earlier in value chain

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Correcting Internal Cost Disadvantages The
Options

• Reengineer how the high-cost activities or
  business processes are performed
• Eliminate some cost-producing activities
  altogether by revamping value chain system
• Relocate high-cost activities to lower-cost
  geographic areas
• See if high-cost activities can be performed
  cheaper by outside vendors/suppliers
• Invest in cost-saving technology
• Simplify product design
• Make up difference by achieving savings in
  backward or forward portions of value chain system

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From Value Chain Analysisto Competitive Advantage

• A company can create competitive advantage by
  managing its value chain so as to
• Integrate the knowledge and skills of employees
  in competitively valuable ways
• Leverage economies of learning / experience
• Coordinate related activities in ways that build
  valuable capabilities
• Build dominating expertise in a value chain
  activity critical to customer satisfaction or
  market success

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From Value Chain Analysisto Competitive Advantage
The strategy-making lesson of value chain
analysis Sustainable competitive advantage can
be created by (1) managing value chain
activities better than rivals and (2) developing
distinctive capabilities to serve customers!
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Question 4 How Strong Is the Companys
Competitive Position?

• Can the firms position be expected to improve or
  deteriorate if present strategy is continued
• How the firm ranks relative to key rivals on each
  industry KSF and relevant measure of competitive
  strength
• Whether the firm has a sustainable competitive
  advantage or disadvantage
• Ability of firm to defend its position in light
  of
• Industry driving forces
• Competitive pressures
• Anticipated moves of rivals

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Assessing a Companys 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 - 10 (1 weak 10 strong)
• 3. Decide whether to use a weighted or
  unweighted rating system
• 4. Sum individual ratings to get overall measure
  of competitive strength for each rival
• 5. Determine whether the firm enjoys a
  competitive advantage or suffers from competitive
  disadvantage

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Question 5 What Strategic IssuesDoes the
Company Need to Address?

• What should management be worried about -- what
  items should be on the companys worry list?
• Requires thinking strategically about
• The pluses and minuses in the industry and
  competitive situation
• The companys resource strengths and weaknesses
  and the attractiveness of its competitive
  position
• A good strategy must address each and every
  strategic issue!

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Identifying the Strategic Issues

• Is present strategy adequate in light of
  competitive pressures and driving forces?
• Is the strategy well-matched to the industrys
  key success factors?
• Does the company need new or different resource
  strengths and competitive capabilities?
• Does present strategy adequately protect against
  external threats and resource deficiencies?
• Is firm vulnerable to competitive attack by
  rivals?
• Where are strong/weak spots in present strategy?

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Stating the IssuesClearly and Precisely

• A well-stated issue involves such phrases as
• What should be done about .?
• How to .?
• Whether to .?
• Should we .?
• Issues need to be precise, specific, and cut
  straight to the chase
• Issues raise questions about
• What actions need to be considered
• What to think about doing