Strategic Planning Process

Internal Analysis
 Internal Analysis
The purpose of internal analysis is to identify the strength weaknesses and limitations
within the organisation.

The companies resources and capabilities needs to be assessed.

Strengths lead to superior performance in the area of efficiency, quality innovation and
responsiveness to customer.

Weaknesses and limitations lead to inferior performance.

A company has Competitive Advantage when it is more profitable than the average
company in its industry.
Competitive Advantage
In order to have a competitive advantage a company must have or create two
basic things

 Distinctive Competencies and the Superior Efficiency, Quality, Innovation and

Customer responsiveness that result from them.

 The profitability is derived from the value customer place on its product, the price it
charges for its products, and the cost of creating those products.
 Distinctive Competencies
Distinctive Competencies are firm specific strength which allow a company to differentiate
its products from those offered by rivals and or achieve substantially lower cost than its
rivals.

Example – McDonalds has a distinctive competence in managing fast food franchises which
leads to higher employee productivity and lower cost.

Example – Toyota has distinctive competencies in the development and operation of

Manufacturing process. It pioneered a whole range of manufacturing techniques such as Just
In Time Inventory system, Self Managing Teams and reduced set time for complex
equipment called Toyota Lean Production system that helped Toyota attain superior
efficiency and product quality.
 Distinctive Competencies - Resources
Distinctive Competencies arise from three complimentary sources

 Resources – refers to the assets of a company. Resources are subdivided into Tangible and
Intangible resources.

 Tangible Resources are physical entities such as Land Building, plant, Equipment, Inventory
and Money.

 Intangible resources are non physical entities that are created by Managers and other employees
such as Brand Names, Reputation of the company, Knowledge that the employees have gained
through experience and intellectual property of the company including that protected through
Patents, Copyrights and Trademarks.
 Distinctive Competencies - Resources

Resources are particularly valuable when they enable a company to create a strong demand
for its products, and or to lower its cost.

Example – Toyotas valuable tangible resources include the equipment associated with its
lean production system.

Example – Microsoft has number of valuable Intangible resources including its Brand
Name and the software code that underlines its Windows Operating System.
 Distinctive Competencies - Capabilities
Capabilities refer to a companies skill at coordinating its resources and putting them to its
productive use.

A companies capabilities are the product of its organisation structure, process control
systems and hiring systems.

It represents the companies norms and values.

Capabilities are intangible and reside not so much in the individuals but in the way these
individuals collectively interact with each other.

Like resources they are important of the company if they are able to create demand for the
product or reduce the cost of the same.
 Distinctive Competencies
The distinction between resources and capabilities are important to understand.

A company may have a firm specific and valuable resources but unless it has the capability
to use those resources effectively it may not be able to create a distinctive competency.

A company may not need firm specific and valuable resources to establish a distinctive
competency so long as it has capabilities that no competitor possess.

Example Nucor Steel – Employee productivity is the highest hence is cost effective.
 Distinctive Competencies
Processes
Manufacturing cycle time, also called manufacturing lead time or throughput time, is
usually defined as the amount of time between the receipt of a customer order and the
shipment of the order.

Cycle time and a variety of capacity issues are considered when assessing the
organizational processes necessary to gain competitive advantage.

(Note: Process analysis is discussed further in Section D, Topic 5: Business Process

Improvement.)
Distinctive Competencies
Build
Resources

Distinctive
Competitive Superior
Competenci Strategies
Advantage Profitability
es

Capabilities Build
Competitive Advantage, Value Creation & Profitability

Competitive Advantage leads to superior profitability. At the most basic level, how
profitable a company becomes depends on three factors:

The value customers place on the company’s products.

The price that a company charges for its products.
The cost of creating those products.
Competitive Advantage, Value
Value Creation per Unit
Creation & Profitability

U-P U = Utility for consumers

U
P = Price
C = Cost of Production
U-P = Consumer Surplus
P-C P-C = Profit Margin
P
U-C = Value Created

C
C
 Competitive Advantage, Value Creation & Profitability
(A)Primary Activity – has to do with the design, creation and delivery of the products, its
marketing, and its support and after sales service.

Research & Development – is concerned with the design of the products and the production
processes.
Although we think of R & D as being associated with the design of physical product and
production processes in manufacturing enterprises, many service companies also undertake R&D.
Example – Banks compete with each other by developing new financial products and new ways of
delivering those products to customers. Online banking and smart debit cards are two recent
examples.
By creating superior product design, R&D can increase the functionality of products which makes
them more attractive to customers, thereby adding value.
Competitive Advantage, Value Creation & Profitability
Production – is concerned with the creation of a good or service. For physical products ,
when we talk about production we generally mean manufacturing.

For services such as banking or retail operation, production typically takes place when the
service is delivered to the customer as when a bank makes a loan to a customer.

The efficient production operation, of Honda and Toyota help those automobile companies
achieve higher profitability relative to competitors such as General Motors.

The production function can also perform its activities in a way that is consistent with high
product quality which leads to differentiation and lower cost.
Competitive Advantage, Value Creation & Profitability
Marketing and Sales
There are several ways in which the marketing and Sales function of a company can help to
create value.
Through brand positioning and advertising, the marketing function can increase the value
that customer perceive to be contained in a company’s product ( and thus the utility they
attribute to the product).

Customer Service
The role of the service function of an enterprise is to provide after sales service and support.
This function can create superior utility by solving customer problems and supporting
customers after they have purchased the product.
Caterpillar supplies spare parts within 24 hours in any part of the world.
Competitive Advantage, Value Creation &
Profitability
(B) Support Activities

Company infrastructure.
Information System.
Materials Management
HR
Business Process Improvement
Support Value Chain Activity

The support activities provide inputs that make it possible for the primary activities to
take place.

Infrastructure refers to the company’s support systems that enable it to maintain its
day-to-day activities. Infrastructure includes functions such as accounting, legal,
administrative, and general management. The infrastructure also includes the
organizational structure, the organization’s control systems, and its culture. Through
strong leadership, top management can shape the company’s infrastructure and thus
the performance of all the other value creation activities that go on within the
company.
Business Process Improvement
Support Value Chain Activity

Information systems are the electronic systems for maintaining records of inventory,
sales, prices, and customer service. For example, information systems can add value
to the customer by tracking inventory and sales so that the company can provide the
proper mix of goods to customers while eliminating items that do not sell well.
Staying current with technological advances and maintaining technical systems
excellence are other sources of value creation.

Materials management is logistics. The logistics function manages the movement of

physical materials through the value chain. Materials management controls
procurement as well as movement of the procured materials through production and
distribution.
Business Process Improvement
Support Value Chain Activity

The human resources function aids the organization in obtaining and keeping the
right mix of skilled people needed to perform its value creation activities effectively.
The human resources function also ensures that the people are properly trained,
motivated and compensated. An effective human resources function leads to greater
employee productivity, which lowers costs. A competent staff performs excellent
customer service, which increases value to the customer.
 Building Blocks of Competitive Advantage
Four factors help a company build and sustain competitive advantage. They are

Superior Efficiency
Quality
 Innovation
Customer Responsiveness
The above mentioned factors allow a company to

 Differentiate its product offering and offer more utility to its customer.
 Lower its cost structure.
 Building Blocks of Competitive Advantage
Efficiency

Efficiency is the relationship between inputs and outputs.

Inputs are factors of production such as Land, Labour, Capital, Management and
Technology.
Outputs are the goods and services produced by the company.
The more efficient the company fewer inputs will be required to produce the given output.
Efficiencies leads to lower cost, higher profitability and competitive advantage.
Components are Employee Productivity and Capital Productivity.
 Building Blocks of Competitive Advantage
Efficiency

Employee productivity refers to the output produced per employee.

Example if GM takes 30 employee hours to assemble a car and Ford takes only 25 hrs, we
can say that Ford’s employee productivity is more that GM.
As long as other things are equal, such as wage rates, we can assume that Ford will have a
lower cost structure than GM.
Thus employee productivity helps a company to attain competitive advantage through lower
cost structure.
Similarly a better Capital productivity also is a measure of efficiency.
Building Blocks of Competitive Advantage
Quality

A product can be thought of as a bundle of attributes – form, features, performance,

durability, reliability, style and design.
A product is said to have superior quality when customers perceive that its attributes
provide them with higher utility than the attributes of product.
Examples – Rolex Watches
Quality of Product = Excellence and Reliability.
Excellence – Product’s design and styling, aesthetic appeal, Features and Function etc.
Reliability – It consistently does the job it was designed for. Example- Toyota Cars.
Building Blocks of Competitive Advantage
Innovation

Innovation refers to the act of creating new products or processes.

Product Innovation – is the development of product that are new to the world or have
superior attributes to existing product.
 Examples Intel’s inventions of the Micro processor in the 1970’s.
Cisco’s development of the router for routing data over the internet in the mid 1980.
Apple’s development of the iPod in the early 2000.
Product innovation creates value by customer perception of higher value to the new
product.
Building Blocks of Competitive Advantage
Innovation

Process Innovation – is the development of new process for producing products and
delivering them to customers.
Example – Toyota’s lean production system; Just in Time Inventory system; self
managing teams and reduced set up time for complex equipment.
Process innovation often allows a company to create value by lowering production
cost.
Building Blocks of Competitive Advantage
Customer Responsiveness

Better customer responsiveness means identifying and satisfying its customer needs
in the best and shortest possible time.
The above results in customer attributing more value to the product thereby creating a
competitive advantage.
Continuous product innovation is one of the mainstays of customer responsiveness.
Product customisation based on customer feedbacks.
Customer response time – the time that it takes for a good to be delivered or a service
to be performed.
Analysing Competitive Advantage & Profit
If a company manager is to perform good internal analysis, they need to be able to
analyse the financial performance of their company.
This will help them determine whether;

 They are more or less profitable than their competitors.

 The performance of the company has been improving or deteriorating over time.
 Their company strategies are maximising the value being created.
 Their cost structure is out of line with those of competitors.
 The company is using the resources judiciously or not.
 Analysing Competitive Advantage & Profit
The key measure of a company’s financial performance is its profitability which captures the
return that a company is generating on it’s investments.

Different measures of profitability exists such as Return on assets and return on equity.

However ROIC (Return on Invested Capital) is the best measure because it focuses on the
true operating performance of he company.

ROIC Is defined as Net Profit / Invested Capital. Net profit is the profit after taxes.

Invested Capital is the amount that is invested in the operation of a company; property, plant,
equipment, and inventory and other assets.
 Analysing Competitive Advantage & Profit
A company’s ROIC can be algebraically decomposed into two major components i.e. Return on Sales
(ROS) and Capital Turnover.

ROS = Net Profit / Revenue

Capital Turnover = Revenue / Invested Capital.

ROS measures how effectively the company converts revenues into profits.

Capital Turnover measures how affectively the company employs its invested capital to generate revenues.

These two ratio’s can be further decomposed into some basic accounting ratios.
Analysing Competitive Advantage & Profit

ROS COGS / Sales

SGA Exp. /
Sales
ROIC

R&D/Sales

Working Cap.
Capital / Sales
Turnover
PPE /Sales
 Analysing Competitive Advantage & Profit
A company’s manager can increase ROIC by pursuing strategies that increase the company’s
return on sales.

To increase company’s ROS they can pursue strategies that reduce the cost of goods sold for
a given level of sales revenue. (COGS / Sales)

Alternatively they can increase ROS by pursuing strategies that increase sales revenue more
than they increase the cost of business as measured by COGS, SG&A and R& D Expenses.

They can increase the ROS by pursuing strategies that lower costs or increase value through
differentiation, thus allowing the company to increase its prices more than its costs.
Analysing Competitive Advantage & Profit
How to Assess Internal Resources, Skills, and Processes.

Organizations may choose from a variety of tools and techniques to analyze their internal
capabilities, including:

Baldrige National Quality Program Criteria for self-assessment • ISO 9001 quality system
and ISO 14000 environmental management system requirements for gap analysis.

Benchmarking processes to understand best-in-class • Competitive analysis of the five forces

to understand competitors’ businesses, market share, etc.

Employee competency assessments to determine current knowledge, skills, experience, and

aptitude
Analysing Competitive Advantage & Profit
Training needs analysis to identify training needs that can support organizational initiatives.

Employee surveys to determine if employees understand the organization’s focus and to

assess conditions and/or issues in the current work environment, compensation approaches,
management, etc.

Audits to verify that processes are working within established limits

Analysing Competitive Advantage & Profit
Linkage of Internal Capability Analysis to Strategic Planning

Internal capability analysis has two phases.

The first phase is establishing a snap-shot of the present state and identifying gaps.

The second phase involves making decisions about closing the critical gaps to the desired state.

Some gaps may be fairly simple and straightforward to address while others may require costly
capital expenditures and time.

 The cost of developing any new capabilities must be weighed against the potential payoffs.
Different capabilities can provide sources of competitive advantages.
Analysing Competitive Advantage & Profit
An organization’s future success often depends on the capabilities it develops.

 Capabilities that require financial investments can be risky because returns are uncertain.

But not investing can be just as risky as it may cause an organization to fall behind com-
petitors, fail to sustain profits, or compromise existing capabilities, leading to lost
opportunities.

 Strategic planning should involve an understanding of the internal requirements and

capabilities needed prior to the operational plans being made. In the end, due diligence in
assessing internal capabilities and addressing them appropriately helps the organization
position itself to take advantage of future opportunities.