PAN AFRICA CHRISTIAN UNIVERSITY

BUS 3133: STRATEGIC MANAGEMENT

LECTURE 4: INTERNAL ANALYSIS

COMPANY ANALYSIS

This is the assessment of a firm’s strengths and weaknesses. A firm achieves success by
matching opportunities with resources. Assessment of the firm’s strengths and weaknesses helps
to identify the ways in which the organization can take advantage of opportunities.

This process involves assessment of the following factors:

1. THE MARKET POSITION OF THE FIRM

A firm’s market position is affected by how well it meets the key success factors in the
industry.
Its analysis attempts to establish:
i. The key success factors in the industry
ii. Whether the firm has these factors
iii. If not, whether it is in a position to acquire them
iv. If it does not have the factors and cannot acquire them, would it survive or it should
quit.

A firm’s market position is also affected by the position of its product in the product life
cycle. The product life cycle shows the distinct stages in the sales and profit history of the
product. The stages in the product lifecycle correspond to distinct opportunities and
problems in respect to marketing strategy and profit potential.

The Product Life Cycle

The stages through which individual products develop over time is called commonly known as
the "Product Life Cycle". The life cycle concept may apply to a brand or to a category of
product. Its duration may be as short as a few months for a fad item or a century or more for
product categories such as the gasoline-powered automobile.

The classic product life cycle has four stages namely introduction; growth; maturity and decline.

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Introduction Stage

At the Introduction (or development) Stage market size and growth is slight. It is possible that
substantial research and development costs have been incurred in getting the product to this
stage. In addition, marketing costs may be high in order to test the market, undergo launch
promotion and set up distribution channels. It is highly unlikely that companies will make
profits on products at the Introduction Stage. Products at this stage have to be carefully
monitored to ensure that they start to grow. Otherwise, the best option may be to withdraw or
end the product.

Growth Stage

The Growth Stage is characterized by rapid growth in sales and profits. Profits arise due to an
increase in output (economies of scale) and possibly better prices. At this stage, it is cheaper
for businesses to invest in increasing their market share as well as enjoying the overall
growth of the market. Accordingly, significant promotional resources are traditionally invested
in products that are firmly in the Growth Stage.

Maturity Stage

The Maturity Stage is, perhaps, the most common stage for all markets. It is in this stage that
competition is most intense as companies fight to maintain their market share. Here, both
marketing and finance become key activities. Marketing spend has to be monitored carefully,
since any significant moves are likely to be copied by competitors. The Maturity Stage is the
time when most profit is earned by the market as a whole. Any expenditure on research and
development is likely to be restricted to product modification and improvement and perhaps to
improve production efficiency and quality.

Decline Stage

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In the Decline Stage, the market is shrinking, reducing the overall amount of profit that can
be shared amongst the remaining competitors. At this stage, great care has to be taken to
manage the product carefully. It may be possible to take out some production cost, to transfer
production to a cheaper facility, sell the product into other cheaper markets. Care should be
taken to control the amount of stocks of the product. Ultimately, depending on whether the
product remains profitable, a company may decide to end the product.

Examples

Set out below are some suggested examples of products that are currently at different stages of the
product life-cycle:

INTRODUCTION GROWTH MATURITY DECLINE

Third generation mobile
Portable DVD Players Personal Computers Typewriters
phones
E-conferencing Email Faxes Handwritten letters

iris-based personal
Smart cards Credit cards Cheque books
identity cards
2. THE MARKET SHARE OF THE FIRM

A firm seeks to establish whether its market share is growing or declining. In case of decline, the
manager has to find out the causes of decline – is it the level of technology, quality of products,
poor or inappropriate marketing strategies, etc.

A growing market share is an indication of unique strengths relative to the firm’s

competitors like effective processes, superior marketing strategies, competitive product
pricing, superior customer service, etc.

Sales figures do not necessarily indicate how a firm is performing relative to its competitors.
Rather, changes in sales simply may reflect changes in the market size or changes in economic
conditions.

The firm's performance relative to competitors can be measured by the proportion of the
market that the firm is able to capture. This proportion is referred to as the firm's market
share and is calculated as follows:

Market Share = Firm's Sales / Total Market Sales

Sales may be determined on a value basis (sales price multiplied by volume) or on a unit basis
(number of units shipped or number of customers served).

While the firm's own sales figures are readily available, total market sales are more difficult to
determine. Usually, this information is available from trade associations and market research
firms.

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Based on the findings and the objectives of the firm, it may choose to increase its market
share through advertising, improvements on quality and pricing, and improvements on the
distribution chain. A firm may seek to increase its market share to achieve better economies of
scale, sales growth in a stagnant industry, reputation, and increased bargaining power.

Increase in market share may however not be desirable when:

 The firm is near its production capacity and an increase in market share might
necessitate investment in additional capacity. If this capacity is underutilized, higher
costs will result.
 Overall profits may decline if market share is gained by increasing promotional
expenditures or by decreasing prices.

 A price war might be provoked if competitors attempt to regain their share by lowering
prices.

 A small niche player may be tolerated if it captures only a small share of the market. If
that share increases, a larger, more capable competitor may decide to enter the niche.

 Antitrust issues may arise if a firm dominates its market.

In some cases it may be advantageous to decrease market share. For example, if a firm is
able to identify certain customers that are unprofitable, it may drop those customers and lose
market share while improving profitability.

3. THE POSITION OF THE COMPANY’S PRODUCT

The market position of a firm is influenced by the quality and distinctiveness of the product
relative to its price. Such factors as durability, distinctive features and performance influence
the attitude of customers towards the product.

The company should identify the characteristics of the product or services that the
consumers consider important and then appraise their product in such terms. A company
might for instance find itself in the dilemma of not being able to offer high quality products at
low prices, which is preferred by customers. The company’s options may be to produce high
quality products for the high income market, or focus on lower quality products for the low
income (price sensitive) market.

4. STRENGTH OF THE FIRM IN ITS MAJOR MARKETS

The company’s position may be affected by its reputation in market, that is, what people think
about the company and its products (The Delamere products and the Cholmondley court case).
Promotion activities may help improve its reputation.

5. OTHER IMPORTANT FACTORS

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 i. The cost position of the company relative to competitors
ii. Relative financial strengths – availability of adequate finances to take advantage of
emerging opportunities
iii. Relative efficiency – plant & equipment, technology, systems & processes, etc
iv. Firm’s management – skills and competencies, if management is conversant with key
issues facing the firm.

COMPETITIVE ADVANTAGE ANALYSIS

Competitive Advantage - Definition

A competitive advantage is an advantage over competitors gained by offering consumers

greater value, either by means of lower prices or by providing greater benefits and service
that justifies higher prices.

When a firm sustains profits that exceed the average for its industry, the firm is said to
possess a competitive advantage over its rivals. The goal of much of business strategy is to
achieve a sustainable competitive advantage.

Michael Porter identified two basic types of competitive advantage:

 cost advantage
 differentiation advantage

A competitive advantage exists when:

i. The firm is able to deliver the same benefits as competitors but at a lower cost (cost
advantage), or
ii. Deliver benefits that exceed those of competing products (differentiation advantage)

Thus, a competitive advantage enables the firm to create superior value for its customers and
superior profits for itself.

Cost and differentiation advantages are known as positional advantages since they describe
the firm's position in the industry as a leader in either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a
competitive advantage that ultimately results in superior value creation.

Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage the firm
must have resources and capabilities that are superior to those of its competitors. Without
this superiority, the competitors simply could replicate what the firm was doing and any
advantage quickly would disappear.

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Resources are the firm-specific assets useful for creating a cost or differentiation advantage and
that few competitors can acquire easily. The following are some examples of such resources:

 Patents and trademarks

 Proprietary know-how
 Installed customer base
 Reputation of the firm
 Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of a
capability is the ability to bring a product to market faster than competitors. Such capabilities are
embedded in the routines of the organization and are not easily documented as procedures and
thus are difficult for competitors to replicate.

The firm's resources and capabilities together form its distinctive competencies. These
competencies enable innovation, efficiency, quality, and customer responsiveness, all of which
can be leveraged to create a cost advantage or a differentiation advantage.

It is important therefore for a firm to know its position with regard to finance, marketing,
production, personnel, and corporate resources.

Why do a competitive advantage analysis?

Executives who are aware of their advantages are able to select opportunities which may be
effectively exploited by the firm. Every firm has competitive advantages and disadvantages.
The large firms for instance may have the advantage of financial strength and competent
management but may have a disadvantage of poor customer service. Executives should therefore
draw a profile of strategic advantages and match them with the environmental
opportunities and threats so as to create optimal conditions for strategic management.

Factors to consider in analyzing competitive advantage

a) Marketing factors
The organization should seek to identify the specific areas of marketing where they are stronger
or weaker than the competitors. These may include:

i. Marketing research systems – some have strong systems while others are weaker in this
area
ii. Product or service mix – all products and services a firm offers to customers. A firm
with a wider product mix is able to meet needs of a wide range of customers
iii. Product or service line – refers to specific types of brands in one product line. The
bigger the product line, the better the firm is placed to serve its customers.
iv. New product leadership – If it’s the first firm to introduce the product in the market, it
could enjoy an advantage over later entrants
v. Customer loyalty

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 vi. Packaging – For some products and in some markets, packaging is a value adding factor.
Some packages might be more expensive than the product. Other firms may use cheaper
packaging and appeal to their customers through lower pricing.
vii. Pricing – some firms develop strengths by offering the lowest prices in the market while
others may do so by offering the highest prices.
viii. Advertising – Some firms are strong in advertising while others hardly advertise.
ix. After sales service – e.g. motor vehicle assemblers and distributors, IT firms invest a lot
in this.
x. Distribution networks – an extensive distribution network is an advantage to the firm,
e.g. Coca-Cola, BAT, EABL, Safaricom, etc.

b) Financial strength factors

i. Total financial resources - the more the finances, the better placed is the organization to
take advantage of opportunities
ii. Effective capital structure – does it allow for flexibility, e.g. to raise additional capital
as seen in the last few years with the public offers by companies.
iii. Good relations with owners, stakeholders, banks, etc may also give a firm competitive
strength. Many small firms collapse due to poor relationships with banks and suspicion
by shareholders and the public.
iv. Financial planning and budgeting procedures – they give a firm strength if they are
effective
v. Auditing and accounting procedures

c) Production factors
i. Lower costs of production are strength to the firm
ii. Raw materials costs – How near the firm is to the source, and the quality of the material
iii. Effective maintenance policies for plant and equipment

d) Personnel factors
i. Quality of employees – skills and competence
ii. Good relations with trade unions – issues of strikes and go slows. Are proper human
resources policies in place and do they observe labour laws.
iii. Effective personnel policies – hiring, training, performance appraisal, compensation etc.
Their availability leads to highly motivated work force and high productivity
iv. Lower cost of labour – Low absenteeism rates and low turnover result in low labour
costs

e) Corporate resources
i. Corporate image – how people view the firm especially customers, shareholders,
employees and suppliers. A positive image may attract loyal customers, better employees,
affect relationship with suppliers, etc
ii. Organization climate – a good working environment enhances employee motivation and
hence productivity
iii. Organization structure – the design of an organization which specifies how authority is
distributed within the organization. A more effective structure leads to more timely
decisions and effective strategies.

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iv. Company size relative to industry – a large firm may have competitive advantage
because its products or services are well known. A company serving 50% of the market
for instance has a competitive advantage over those serving less portion of the market,
e.g. Coca-Cola and Kuguru Food’s Softa Brand of soft drinks.
v. Influence with government and regulatory agencies – Companies where the
government has some interests. Influential companies like Safaricom and formerly KBC
have the advantages of accessing information regarding opportunities and threats before
others. They are also in a position to influence decisions affecting them. Government
parastatals and other state corporations fall under this category.
vi. Effective strategic management systems – clear mission and objectives leads to
effective utilization of a firm’s resources. Poor planning or lack of it is a disadvantage
vii. Stage of corporate development – A firm in mature stage will have developed expertise
in key areas of business as compared to firms at the initial stage of development