Title: Internal Environment
1Internal Environment
- 3rd Lecture
- MSc Agricultural Economics and Management
2External and Internal Analyses
By studying the external environment, firms
identify what they might choose to do
Opportunities and threats
3External and Internal Analyses
By studying the internal environment, firms
identify what they can do
Unique resources, capabilities, and core
competencies (sustainable competitive advantage)
The Firm
4Challenge of Internal Analysis
- How do we effectively manage current core
competencies while simultaneously developing new
ones? - How do we assemble bundles of resources,
capabilities and core competencies to create
value for customers? - How do we learn to change rapidly?
5Conditions Affecting Managerial Decisions About
Resources, Capabilities, and Core Competencies
- Uncertainty regarding characteristics of the
general and the industry environments,
competitors actions, and customers preferences - Complexity regarding the interrelated causes
shaping a firms environments and perceptions of
the environments - Intraorganizational Conflicts among people making
managerial decisions and those affected by them
6Choosing the right tools for internal analysis
- Start with simple techniques
- Consider all tools and identify those likely to
be useful - Define the competitive capabilities the
enterprise needs - Identify the subsystems which support these
capabilities - Identify core competence relative to competitive
capabilities - Determine changes to enhance/improve core
competence - Take a systemic view
- Adjust the methods of analysis in the light of
what is found
7Some commonly used techniques for internal
analysis
Single Businesses Resource Audit Analysis of
cost and profit Benchmarking Value Chain
Analysis Supply Chain Analysis
Multiple Businesses Portfolio Analysis
Both Single and Multiple Businesses Core
Competencies Shareholder Value Analysis
8Resource Audit
- Resources
- Physical
- Human
- Financial
- Other
- Quality and Quantity
- Unique resources
- A good initial analysis
9Internal Audit
Parallels process of external audit
- Information from
- Management
- Marketing
- Finance/accounting
- Production/operations
- Research Development
- Management information Systems
10Marketing
Marketing Functions
- Customer analysis
- Selling products/services
- Product service planning
- Pricing
- Distribution
- Marketing research
- Opportunity analysis
11Finance/Accounting
Finance/Accounting Functions
- Investment decision (Capital budgeting)
- Financing decision
- Dividend decision
12Production/Operations
Production/Operations Functions
- Process
- Capacity
- Inventory
- Workforce
- Quality
13Research Development
Research Development Functions
- Development of new products before competitors
- Improving product quality
- Improving manufacturing processes to reduce costs
14Management Information Systems
- Information Systems
- Security
- User-friendly
- E-commerce
15Analysis of Costs and Profit
- Current sources of profits and trends
- Recast standard reporting to give new insights
- Pragmatic approach to get value from time and
effort spent - A good initial analysis
Single Businesses Resource Audit Analysis of
cost and profit Benchmarking Value Chain
Analysis Supply Chain Analysis
16Benchmarking
- Objective comparison with best in class
- Simple in theory - Hard in practice
- Observed differences in performance may be due
to differences in parameters - Qualitative observations may be more valuable
than quantitative
17Benchmarking - at three levels
Level of
Through
Examples of measures
benchmarking
Resources
Resource audit
Quantity of resources,
e.g.
revenue/employee
capital intensity
Quality of resources,
e.g.
qualifications of
employees
age of machinery
uniqueness (e.g.
patents)
Competences in
Analysing activities
Sales calls/sales person
separate activities
Output/ employee
Materials wastage
Competences
Analysing overall
Market share
through
performance
Profitability
Productivity
managing linkages
18Value Chain Analysis
- Basic Value chain
- Elegant in theory
- Time-consuming in practice
- Revised value chain to reflect power of people
and knowledge
19Value Creation
20The Basic Value Chain
Margin
Margin
Service
Marketing Sales
Technological Development
Human Resource Mgmt.
Support Activities
Outbound Logistics
Firm Infrastructure
Procurement
Operations
Inbound Logistics
Primary Activities
21To capitalize on the usefulness of the Value
Chain concept...
it is important to recognize that...
22Value Chains are part of a Total Value System
Firm Value Chain
Supplier Value Chain
Channel Value Chain
Buyer Value Chain
23Value Chains are part of a Total Value System
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Supplier Value Chain
Upstream Value
Perform valuable activities that complement the
firms activities
24Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Buyer Value Chain
Upstream Value
Channel Value Chain
Perform valuable activities that complement the
firms activities
Each firm must eventually find a way to become a
part of some buyers value chain
25Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Upstream Value
Each firm must eventually find a way to become a
part of some buyers value chain
Perform valuable activities that complement the
firms activities
Ultimate basis for differentiation is the ability
to play a role in a buyers value chain
This creates VALUE!!
26Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Each firm must eventually find a way to become a
part of some buyers value chain
Upstream Value
Perform valuable activities that complement the
firms activities
Ultimate basis for differentiation is the ability
to play a role in a buyers value chain
This creates VALUE!!
Value chains vary for firms in an industry,
reflecting each firms unique qualities
- History
- Strategy
- Success at Implementation
27Outsourcing
Outsourcing is the purchase of some or all of a
value-creating activity from an external
supplier Usually this is because the specialty
supplier can provide these functions more
efficiently
28Strategic Rationales for Outsourcing
- Improve Business Focus
- lets company focus on broader business issues by
having outside experts handle various operational
details - Provide Access to World-Class Capabilities
- the specialized resources of outsourcing
providers makes world-class capabilities
available to firms in a wide range of applications
29Strategic Rationales for Outsourcing
- Accelerate Business Re-Engineering Benefits
- achieves re-engineering benefits more quickly by
having outsiders--who have already achieved
world-class standards--take over process - Share Risks
- reduces investment requirements and makes firm
more flexible, dynamic and better able to adapt
to changing opportunities
30Strategic Rationales for Outsourcing
- Free Resources for Other Purposes
- permits firm to redirect efforts from non-core
activities toward those that serve customers more
effectively
31Outsourcing Issues
- Greatest Value
- outsource only to firms possessing a core
competence in terms of performing the primary or
support activity being outsourced - Evaluating Resources and Capabilities
- dont outsource activities in which the firm
itself can create and capture value - Environmental Threats and Ongoing Tasks
- do not outsource primary and support activities
that are used to neutralize environmental threats
or complete necessary ongoing organizational
tasks
32Outsourcing Issues
- Nonstrategic Team of Resources
- do not outsource capabilities that are critical
to their success, even though the capabilities
are not actual sources of competitive advantage - Firms Knowledge Base
- do not outsource activities that stimulate the
development of new capabilities and competencies
33Revised Value Chain
SUPPORT ACTIVITIES
revenue, profit, market share,
PRIMARY ACTIVITIES
34 Product portfolio matrices
35Product portfolio matrices
36Portfolio Analyses
- Over-coming some pitfalls
- Defining high and low (growth or share) can
be difficult - Plot SBUs not products
- Apply to market segments not whole markets
- Assess the role of each SBU
- Consider wider resource implications - not just
cash - Dogs may have a positive role
37Tests for Core Competence
- Essential to corporate survival in short and long
term - Invisible to competitors
- Difficult to imitate
- Unique to the enterprise
- Result from a mix of skills, resources and
processes - A capability which the organization can sustain
over time - Greater than the competence of an individual
- Essential to the development of core products
- Essential to the implementation of strategic
intent - Essential to the strategic choices of the
enterprise - Marketable and commercially viable
- Few in number
38The roots of core competence for a typical
manufacturing business
39The roots of core competence for typical
professional services firms
40Components ofInternal Analysis
41Resources, Capabilities and Core Competencies
- Capabilities
- Are the firms capacity to deploy resources that
have been purposely integrated to achieve a
desired end state - Emerge over time through complex interactions
among tangible and intangible resources - Often are based on developing, carrying and
exchanging information and knowledge through the
firms human capital
42Resources, Capabilities and Core Competencies
- Capabilities
- The foundation of many capabilities lies in
- The unique skills and knowledge of a firms
employees - The functional expertise of those employees
- Capabilities are often developed in specific
functional areas or as part of a functional area
43Examples of Firms Capabilities
44Resources, Capabilities and Core Competencies
- Core Competencies
- Resources and capabilities that serve as a source
of a firms competitive advantage - Distinguish a company competitively and reflect
its personality - Emerge over time through an organizational
process of accumulating and learning how to
deploy different resources and capabilities
45Resources, Capabilities and Core Competencies
- Core Competencies
- Activities that a firm performs especially well
compared to competitors - Activities through which the firm adds unique
value to its goods or services over a long period
of time
46Building Sustainable Competitive Advantage
- Four Criteria of Sustainable Competitive
Advantage - Valuable
- Rare
- Costly to imitate
- Nonsubstituable
47The Four Criteria of Sustainable Competitive
Advantage
Valuable Capabilities Help a firm neutralize
threats or exploit opportunities Rare
Capabilities Are not possessed by many
others Costly-to-Imitate Capabilities
Historical A unique and a valuable
organizational culture or brand name
Ambiguous cause The causes and uses of a
competence are unclear Social complexity
Interpersonal relationships, trust, and
friendship among managers, suppliers,
and customers Nonsubstitutable
Capabilities No strategic equivalent
48Building Sustainable Competitive Advantage
- Valuable capabilities
- Help a firm neutralize threats or exploit
opportunities - Rare capabilities
- Are not possessed by many others
49Building Sustainable Competitive Advantage
- Costly-to-Imitate Capabilities
- Historical
- A unique and a valuable organizational culture or
brand name - Ambiguous cause
- The causes and uses of a competence are unclear
- Social complexity
- Interpersonal relationships, trust, and
friendship among managers, suppliers, and
customers
50Building Sustainable Competitive Advantage
- Nonsubstitutable Capabilities
- No strategic equivalent
51Core Competence as a Strategic Capability
Yes
Does it satisfy the criteria of sustainable
competitive advantage?
The source of
No
52Sustainability of Competitive Advantage
- Sustainability of competitive advantage is a
function of - the rate of core-competence obsolescence due to
environmental changes - the availability of substitutes for the core
competence - the imitability of the core competence
53Performance Implications
Costly to Imitate?
Nonsubstitutable
Valuable?
Competitive Consequences
Performance Implications
Rare?
Competitive Disadvantage
Below Average Returns
No
No
No
No
Yes/ No
Competitive Parity
Average Returns
Yes
No
No
Above Average to Average Returns
Yes/ No
Temporary Com- petitive Advantage
Yes
Yes
No
Above Average Returns
Sustainable Com- petitive Advantage
Yes
Yes
Yes
Yes
54Core Competencies Cautions and Reminders
- Never take for granted that core competencies
will continue to provide a source of competitive
advantage - All core competencies have the potential to
become core rigidities - Core rigidities are former core competencies that
now generate inertia and stifle innovation
55Applying Shareholder Value Analysis
56The SWOT diagram may summarise the results of
analyses
Internal Analyses
Weaknesses
Strengths
Opportunities
Threats
External Analyses
57Strategic Assessment of a business as a whole
- Questions
- What business are we really in?
- What real customer needs do we satisfy?
- What problem do we solve for our customers?
58Summary of Managerial Practices to Adopt
- Understand a firm's internal strengths and
weaknesses before attempting to formulate
strategies. - Make sure the strategy you develop reflects this
understanding by using insights gained from your
assessment of the firm's internal strengths and
weaknesses to shape your strategies. - Recognize that internal resources take three
related forms (1) assets that, when combined
with (2) capabilities, result in (3) competencies.
59Summary of Managerial Practices to Adopt
- Use the tests that have been developed as part of
the resource-based view of competition to assess
the ability of internal resources to yield
competitive advantages. - Identify the critical success factors for your
firm and make sure to emphasize them in assessing
the firm's strengths and weaknesses and also in
formulating strategy. - Use the value chain framework to help identify
the contributions various activities make to the
firm's profit margins, and let this information
guide your internal assessment.
60Summary of Managerial Practices to Adopt
- Identify the firm's core business processes and
carefully assess how well they provide value for
both external and internal customers by
integrating the contributions of various pieces
of the value chain. - Use a balanced-scorecard approach to evaluating
the firm's strengths and weaknesses. You may
begin with the financial perspective, but do not
stop there. Use the customer, operations, and
organizational perspectives to understand the
factors that underpin financial performance. Your
best chance for influencing financial performance
is through factors that only become apparent by
adopting these other perspectives.
61Summary of Managerial Practices to Adopt
- Use ratio analysis to assess the financial health
of the business in terms of its liquidity,
leverage, operating efficiency, and
profitability. - Don't limit your use of quantitative analysis to
financial matters. A well-rounded analysis
inevitably draws from nonfinancial matters, and
these may lend themselves to quantitative
analysis, too. - Incorporate qualitative analysis to cover the
important aspects of business that are not easily
quantified.
62Summary of Managerial Practices to Adopt
- In making comparisons, mix and match different
standards (industry' norms, historical data, and
benchmarks) to suit your purposes and to overcome
the limitations inherent in each.