3 SM Internal Analysis 1 - 1

STRATEGIC MANAGEMENT:
INTERNAL ANALYSIS
•Key Topics
1. Strengths and Weaknesses
2. Competitive Advantage
3. Resources, Capabilities and Distinctive
Competencies
4. Competitive Advantage & Value Creation
5. Value Chain
6. Building Blocks of Competitive
Advantage
7. Sustaining Competitive Advantage
Copyright © Houghton Mifflin Company. All rights reserved. 3|1

The Big Picture: the strategy
model
Environ
FIRM
-ment
Strategy
Internal Analysis
The Strategy Process
Formulation 
 
Analysis

Implementation 
“In preparing for battle I have
always found that plans are
useless, but planning is
indispensable.”
- Dwight D.
Eisenhower
Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/ Stockdisc/ Getty Images 3|4
INTERNAL ANALYSIS
•Key Topics
Competencies
5. Value Chain
Advantage

Internal Analysis
The purpose of strategy is to create
superior performance (competitive
advantage)
The purpose of internal analysis is to pinpoint the

strengths and weaknesses of the organization.
Strengths lead to superior performance.
Weaknesses lead to inferior performance.

Internal Analysis:
Strengths and Weaknesses
Internal analysis - along with the external analysis of
the company’s environment - gives managers the
information to choose the strategies and business
model to attain a sustained competitive advantage.
Strengths Weaknesses
Of the enterprise Of the enterprise
are assets that are liabilities that
boost lead to lower
profitability profitability

Internal Analysis
Internal Analysis includes an assessment of:
 Quantity and quality of a company’s
resources and capabilities
 Ways of building unique skills
and company-specific or
distinctive competencies
Building and sustaining a competitive advantage

requires a company to achieve superior:
• Efficiency • Innovations
• Quality • Responsiveness to customers

INTERNAL ANALYSIS
•Key Topics
Competencies
5. Value Chain
Advantage

Internal Analysis:
A Three-Step Process
1. Understand the process by which companies
create value for customers and profit for
themselves.
 Resources + Capabilities  Distinctive competencies
2. Understand the importance of superiority in
creating value and generating high profitability.
 Efficiency  Innovation
 Quality  Responsiveness to Customers
3. Analyze the sources of the company’s
competitive advantage. (if any)
 Strengths – that are driving profitability
 Weaknesses – opportunities for improvement
Copyright © Houghton Mifflin Company. All rights reserved. 3 | 10

Competitive Advantage
 Competitive Advantage
• A firm’s profitability is greater than the average
profitability for all firms in its industry.
 Sustained Competitive Advantage
• A firm maintains above average and superior
profitability and profit growth for a number of years.
The Primary Objective of Strategy

is to achieve a
Sustained Competitive
Advantage
as measured by
Superior Profit and Profit Growth.
Profitability in the
Computer Industry, 1998-2003
Dell has achieved a sustained competitive advantage over its rivals.
Data Source: Value Line Investment Survey

INTERNAL ANALYSIS
•Key Topics
Competencies
5. Value Chain
Advantage

Strategy, Resources,
Capabilities, and Competencies
Figure 3.1

Resource Based View of the Firm
(Some kinds of) RESOURCES

+
(Some kinds of) CAPABILITIES

DISTINCTIVE
CAPABILITIES

Distinctive Competencies and
Role of Resources & Capabilities
Resources
• Tangible (physical) and intangible (non-physical)
• Allow a company to create value for its customers
• Must have skills to take advantage of the resources
• Firm-specific and difficult-to-imitate resources
as well as valuable resources that create strong
demand for a company’s products lead to
=
Capabilities
• Coordinating resources & putting to productive use
• Skills reside in the organization’s rules, routines
and procedures
• Product of its organization, processes & controls
• Firm-specific capabilities to manage its resources
lead to distinctive competencies

Resources
 Resources
• Tangible (physical) and intangible (non-physical)
Name some tangible and intangible resources you are

likely to find in a business
• Allow a company to create value for its customers

• Must have skills to take advantage of the resources
• Firm-specific and difficult-to-imitate resources
as well as valuable resources that create strong
demand for a company’s products lead to

Capabilities
 Capabilities
• Coordinating resources & putting to
productive use
• Skills reside in the organization’s rules,
routines and procedures
• Product of its organization, processes &
controls
Name some capabilities of organizations
• Firm-specific capabilities to manage its
resources lead to
Distinctive Competencies
to Gain Competitive Advantage
Distinctive Competencies
Firm-specific strengths allow a company to
differentiate its products and/or achieve
substantially lower costs than its rivals in order
to gain a competitive advantage.

INTERNAL ANALYSIS
•Key Topics
Competencies
5. Value Chain
Advantage

Competitive Advantage,
Value Creation, and Profitability
How profitable a company becomes
depends on three basic factors:
1. VALUE or UTILITY the customer gets from
owning the product
2. PRICE that a company charges for its
products
3. COSTS of creating those products
 Consumer surplus is the “excess” utility a
consumer captures beyond the price paid.
Basic Principle: the more utility that consumers
get from a company’s products or services, the
more pricing options the company has.
Value Creation per Unit
Figure 3.2

Value Creation
and Pricing Options
There is a dynamic Figure 3.3
relationship among utility,
pricing, demand, and costs.

Comparing Toyota
and General Motors
Figure 3.4
Superior value creation requires that the gap between

perceived utility (U) and costs of production (C)
be greater than that obtained by competitors.

INTERNAL ANALYSIS
•Key Topics
Competencies
5. Value Chain
Advantage

The Value Chain
Figure 3.5
A company is a chain of activities for transforming
inputs into outputs that customers value –
including the primary and support activities.

Do we know what these mean?
Primary Activities
1.Research and Development
2.Production
3.Marketing and Sales
4.Customer Service

Do we know what these mean?
Support Activities
1. Company Infrastructure
• Organizational structure, culture, control systems
2. Information Systems
• Systems that provide information needed to
manage business
3. Materials Management
• Logistics for materials flow
4. Human Resources
• Right people in right place at right time

The Value Chain
Figure 3.5
A company is a chain of activities for transforming
inputs into outputs that customers value –
including the primary and support activities.

The Value Chain Process:
Western Perspective ?
R&D
Production
Marketing
Service
What could be a better perspective
of the same process?
The Value Chain Process
What could be a different perspective

What do the arrows mean ?
What do they say about how products are
made?
What do they say about the flow of
information in the organization?
Does R&D need to know anything that
marketing knows?
Western Perspective ?
R&D
Production
Marketing
Service
What could be a different perspective
An Asian Perspective ?
R&D
Production
Marketing
Service

INTERNAL ANALYSIS
•Key Topics
Competencies
5. Value Chain
Advantage

Internal Building Blocks
of Competitive Advantage
The Generic
Distinctive Competencies  Figure 3.6
Allow a company to:
• Differentiate product offering
• Offer more utility to customer
• Lower the cost structure
regardless of the industry,
its products, or its services
 

 Efficiency
 Measured by the quantity of inputs it
takes to produce a given output:
Efficiency = Outputs / Inputs
 Productivity leads to greater efficiency
and lower costs:
• Employee productivity
• Capital productivity
Superior efficiency helps a company
attain a competitive advantage
through a lower cost structure.
 Quality
Quality products are goods and services that are:
• Reliable and
• Differentiated by attributes that customers
perceive to have higher value
The impact of quality on competitive
advantage:
• High-quality products differentiate and increase
the value of the products in customers’ eyes.
• Greater efficiency and lower unit costs are
associated with reliable products.
Superior quality = customer perception
of greater value in a product’s attributes
Form, features, performance, durability, reliability, style, design
A Quality Map for Automobiles
Figure 3.7
When customers
evaluate the quality of a
product, they commonly
measure it against two
kinds of attributes:
1. Quality as Excellence
2. Quality as Reliability

 Innovation
Innovation is the act of creating
new products or new processes
• Product innovation
» Creates products that customers
perceive as more valuable and
» Increases the company’s pricing options
• Process innovation
» Creates value by lowering production costs
Successful innovation can be a major
source of competitive advantage –
by giving a company something unique,
something its competitors lack.
 Responsiveness to Customers
Identifying and satisfying customers’
needs – better than the competitors
 Superior quality and innovation are integral to
superior responsiveness to customers.
 Customizing goods and services to the unique
demands of individual customers or customer
groups.
 Enhanced customer responsiveness
Customer response time, design,
service, after-sales service and support
Superior responsiveness to customers
differentiates a company’s products and services
and leads to brand loyalty and premium pricing.
Competitive Advantage:
The Value Creation Cycle
Figure 3.8

INTERNAL ANALYSIS
•Key Topics
Competencies
5. Value Chain
Advantage

The Durability of Competitive
Advantage
The DURABILITY of a company’s competitive advantage over
its competitors depends on:
1.Barriers to Imitation
Making it difficult to copy a company’s distinctive competencies
 Imitating Resources
 Imitating Capabilities
2.Capability of Competitors
 Strategic commitment
Commitment to a particular way of doing business
 Absorptive capacity
Ability to identify, value, assimilate, and use knowledge
3.Industry Dynamism
Ability of an industry to change rapidly
Competitors are also seeking to develop distinctive

competencies that will give them a competitive edge.
Industry Dynamism, Punctuated
Equilibrium and Competitive
Structure
Figure 2.6
Punctuated
Equilibrium occurs
when an industry’s
long term stable
Industry structure is punctuated
Structure with periods of rapid
revolutionized change by innovation.
by innovation
Periods of long
term stability
Periods of long
term stability

Why Companies Fail
 Inertia
• Companies find it difficult to change their
strategies and structures
 Prior Strategic Commitments
• Limit a company’s ability to imitate and
cause competitive disadvantage
 The Icarus Paradox
• A company can become so specialized and inner directed
based on past success that it loses sight of market realities
• Categories of rising and falling companies:
• Craftsmen • Builders • Pioneers • Salespeople
When a company loses its competitive advantage,
its profitability falls below that of the industry.
 It loses the ability to attract and generate resources.
 Profit margins and invested capital shrink rapidly.
Avoiding Failure:
Sustaining Competitive Advantage
1. Focus on the Building Blocks of Competitive
Advantage
Develop distinctive competencies and superior performance in:
 Efficiency  Quality
 Innovation  Responsiveness to Customers
2. Institute Continuous Improvement and Learning
Recognize the importance of continuous learning within the organization
3. Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global
competitors
4. Overcome Inertia
Overcome the internal forces that are barriers to change
Luck may play a role in success,
so always exploit a lucky break - but remember:
“The harder I work, the luckier I seem to get.” J P Morgan

The Big Picture: the strategy
model
Environ
FIRM
-ment
Strategy
Internal Analysis
INTERNAL ANALYSIS
•Key Topics
Competencies
5. Value Chain
Advantage

“Developing a sound and
healthy organization requires
understanding the environment
as much as understanding the

organization.”
- Gary Hamel
Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/ Stockdisc/ Getty Images 3 | 49
Drivers of Profitability (ROIC)
Figure 3.9

Ways to Increase ROIC
Increase Company’s Return on Sales
 Increase sales revenue more than costs
 Reduce cost of goods sold
 Reduce spending on SG&A

Sales, Marketing, General & Administrative Expenses
 Reduce R&D expenses
Research & Development  
Increase Capital Turnover 

 Reduce the amount of working capital
Inventory, Accounts Receivable, Payables
 Reduce the amount of fixed capital
PPE - Property, Plant & Equipment

3 SM Internal Analysis 1 - 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

3 SM Internal Analysis 1 - 1

Uploaded by

Copyright:

Available Formats

STRATEGIC MANAGEMENT:

Copyright © Houghton Mifflin Company. All rights reserved. 3|1

Copyright © Houghton Mifflin Company. All rights reserved. 3|5

The purpose of internal analysis is to pinpoint the

Copyright © Houghton Mifflin Company. All rights reserved. 3|6

Copyright © Houghton Mifflin Company. All rights reserved. 3|7

Building and sustaining a competitive advantage

Copyright © Houghton Mifflin Company. All rights reserved. 3|8

Copyright © Houghton Mifflin Company. All rights reserved. 3|9

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 10

The Primary Objective of Strategy

Data Source: Value Line Investment Survey

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 12

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 13

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 14

(Some kinds of) RESOURCES

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 15

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 16

Name some tangible and intangible resources you are

• Allow a company to create value for its customers

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 17

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 19

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 20

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 22

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 23

Superior value creation requires that the gap between

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 24

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 25

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 26

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 27

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 28

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 29

What could be a different perspective

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 33

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 34

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 35

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 38

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 41

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 42

Competitors are also seeking to develop distinctive

Copyright © Houghton Mifflin Company. All rights reserved. 2 | 44

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 46

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 48

as much as understanding the

Copyright © Houghton Mifflin Company. All rights reserved. 3 | 50

Increase Capital Turnover 

You might also like