Internal Analysis

Introduction
 Strategic analysis of any Business
enterprise involves two stages: Internal
and External analysis.

 Internal analysis is the systematic

evaluation of the key internal features
of an organization.
 External analysis will be discussed later.
 Internal Analysis
 STRENGTH = factor that is better than:
past performance
key competitors
industry as a whole
 WEAKNESS = factor that is worse than:
past performance
key competitors
industry as a whole

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Four broad areas need to be considered
for internal analysis
 The organization’s resources, capabilities
 The way in which the organization
configures and co-ordinates its key value-
adding activities
 The structure of the organization and the
characteristics of its culture
 The performance of the organization as
measured by the strength of its products.
 Resources fall within several categories:
 Human
 Financial
 Physical
 Technological
 Informational

 An audit of resources would be likely to include

an evaluation of resources in terms of availability,
quantity and quality, extent of employment,
sources, control systems and performance.
 Resources
 Resources are assets employed in the activities and
processes of the organization.
 They can be tangible or intangible.
 They can be obtained externally (organization-
addressable) or internally generated (organization-
specific).
 They can be specific and non-specific:
 Specific resources can only be used for highly
specialized purposes and are very important to the
organization in adding value to goods and services.
 Assets that are less specific are less important in adding
value, but are more flexible.
Approaches for scanning and
analyzing Internal Variables
 Functional Analysis
 Value Chain Analysis
 Core Competencies Analysis

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Functional Analysis

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 Management

1. General Management
2. Human Resource Management

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 General Management Factors
 Structure of the organization
 Organizational Culture
 Record in Achieving Objectives
 Top management skills, capabilities, &
interests.
 Reputation of the Organization and Top
Management
 Social Responsibility record
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 Human Resource Management
 Number of employees
 Unionization
 Employee skills and morale
 Quality of Work/Life Issues
Recent downsizings
 Recognition/promotion/reward systems
 Training programs; educational
reimbursement
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 Operations (Manufacturing or
Service Firms)
 Quality Initiatives
Quality certifications
Policies and procedures for quality
 Six sigma quality = 3.4 manufacturing defects per
million items
 Location of facilities
 Outsourcing
 Flexible manufacturing
 Raw material costs and availability
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Operations - Continued
(Manufacturing or Service)

 Economies of scale
decreasing fixed costs/ unit when producing
more
 Economies of scope
common parts of different products
manufactured together.
 Re-engineering
 Percentage of cost of goods sold to sales
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 Information Systems
 Chief Information Officer
 Network Capabilities
 Hardware and software upgrades
 Y2K compliance & costs
 Internet page
quality; features

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 Research and Development
 Expenditures
Over time
In relation to competitors/industry
Percentage of sales
 Product to market time
 Own labs/facilities or lease?

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 Finance
 Currency risk management
Global impact
 Financing decisions

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Value Chain Analysis

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 Global Value Chain Analysis
 Competitive advantage depends on the ability
of the organization to organize its resources
and value-adding activities in a way that is
superior to its competitors.

 Value chain analysis is a technique developed

by Porter (1985) for understanding an
organization’s value-adding activities and
relationship between them.
 Value can be added in two ways:
By producing products at a lower cost than
competitors
By producing products of greater
perceived value than those of competitors.

 Porter extended value chain analysis to the

value system, analysis of the relationship
between the organization, its suppliers,
distribution channels and customers.
 Firm Infrastructure
general management,accounting finance
Human Resource Management
Support
recruiting, training, development
Activities
Technology Development
R&D, product and process improvement
Procurement
purchasing raw materials; machines, supplies

Inbound Operations Outbound Marketing Service

Logistics machining Logistics and Sales instal-
raw matl assembling ware- advertising lation,
handling testing housing promotion repair,
ware- packaging distri- pricing replace-
housing bution channel ment
relations

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PRIMARY ACTIVITIES
 The Value Chain
 The value chain is the chain of activities
which results in the final value of a
business’s products.
 Value added, or margin is indicated by
sales revenue minus costs.

 Porter divided internal parts of organization

into primary and support activities
Primary activities are those that
directly contribute to production of
good or services and organization’s
provision to customer

Support activities are those that aid

primary activities, but do not
themselves add value
 Certain activities or combinations of activities are
likely to relate closely to the organization’s core
competences, termed core activities. They are:
 Add the greatest value
 Add more value than the same activities in
competitors’ value chains
 Relate to and reinforce core competences

 Other value chain activities relate to capabilities,

but do not add greater value than competitors
and therefore do not relate to core competence.
 The Value System
 The value chain of an individual organization
provide an incomplete picture of its ability to
add value.
 Many value-adding activities are shared
between organizations often in the form of a
collaborative network.
 As organizations identify and concentrate on
their core competences and core activities, they
increasingly outsource activities to other
business for whom such activities are core.
 The value system is the chain of activities from
supply of resources through to final consumption of
a product.
 The total value system, in addition to the
organization’s own value chain, can consists of
upstream linkages with suppliers and downstream
linkages with distributions and customers.
 The value system is a similar concept to that of the
supply chain and illustrates the interactions
between an organization, its suppliers, distribution
channels and customers.
 Distribution
Supplier Competitor channel
Customers

Distribution
Supplier Organization Customers
channel

Distribution
Supplier Competitor channel
Customers

The Value System

 The “Global” Value Chain
 The configuration of an organization’s activities
relates to where and in how many nations each
activities in the value chain is performed.
 Co-ordination is concerned with the management
of dispersed international activities and the
linkages between them.
 Managers must examine the current configuration
of value-adding activities and the extent and
methods of co-ordination as part of their strategic
analysis, which may determine possibilities for
reconfiguration or improving co-ordination
Core Competencies
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 Core Competencies of the
Corporation
 Real sources of advantage - not based on
businesses.
management’s ability to consolidate
corporatewide technologies and production into
competencies.
 Core competencies are collective learning in
the organization, especially:
 how to coordinate diverse production skills by
integrating multiple streams of technologies.
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 Three tests to identify core
competencies
 Provide potential access to a wide variety of
markets.
 Make a significant contribution to the
perceived customer benefits of the end
product.
 Are difficult to imitate.

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 examples
Core Competencies Products/businesses
 Engines
 Powertrains  Cars; motorcycles; lawn
mowers; generators

 Optics
 Copiers; laser printers;
 Imaging
cameras; image
 Microprocessor scanners; medical
controls imaging

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 More kinds of core
competencies:
 Systems Integration
 Virtual reality
 Bioengineering
 Delighting the customer

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 General Competences/capabilities
 They are assets like industry-specific skills,
relationships and organizational knowledge
which are largely intangible and invisible assets.
 Competences and capabilities will often be
internally generated, but may be obtained by
collaboration with other organizations.
 Certain competences are likely common to
competing businesses within a global industry
or strategic group.
Core Competences/Distinctive Capabilities
 Core competences or distinctive capabilities
are combinations of resources and capabilities
which are unique to a specific organization and
which are responsible for generating its
competitive advantage.
 Kay (1993) identified four potential sources of
Core competences:
 Reputation
 Architecture (i.e., internal and external relationship)
 Innovation
 Strategic assets
 Criteria to evaluate Core Competences
 Complexity: How elaborate is the bundle of resources
and capabilities which comprise the core competence?
 Identifiability: How difficult is it to identify?
 Imitability: How difficult is it to imitate?
 Durability: How long does it be replaced by an
alternative competences?
 Superiority: Is it clearly superior to the competences of
other organizations?
 Adaptability: How easily can the competence be
leveraged or adapted?
 Customer orientation: How is the competence perceived
by customers and how far is it linked to their needs?
 Resources: Capabilities: Core competence
human, financial, Industry-specific Distinctive and superior
physical, skills, relationships, skills, technology Perceived
technological, + organizational = relationships, customer
legal, informational knowledge knowledge and benefits/value
Intangible reputation of the firm added
Tangible and and invisible Unique, and
visible assets assets difficult to copy

Inputs to Integration of
the firm’s resources into
processes value-adding
activities
Not all capabilities are core Denotes feedback
competences – only those loop
that add greater value than denotes core competence
those of competitors development

The relationships between resources, capabilities and core competence