CHAPTER FOUR

Internal Scanning:
Organizational Analysis
 Contents
• A Resource-Based Approach to Organizational Analysis
– Resources, Capabilities and Core Competencies
– Using Resources to Gain Competitive Advantage
– Determining the Sustainability of an Advantage
• Value-Chain Analysis
– Industry Value-Chain Analysis
– Corporate Value-Chain Analysis
• Scanning Functional Resources and Capabilities
– Basic Organizational Structures
– Corporate Culture: The Company Way
 INTRODUCTION
• Scanning and analyzing the external environment for
opportunities and threats is not enough to provide an
organization a competitive advantage.
• This internal scanning, often referred to as
organizational analysis, is concerned with identifying
and developing an organization’s resources and
competencies.
 External and Internal Analyses
Environment By studying the external
Sociocultural environment, firms identify
what they might choose to
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External and Internal Analyses

By studying the internal

environment, firms
identify what they can do

Unique resources,
capabilities, and
core competencies
(sustainable competitive
advantage)
4.1 A Resource-Based Approach to Organizational Analysis

• This approach help the strategist to understand the

internal situation from resource perspective.
• To analyze the company situation, it underlies on
availability of resource, capability of the firm, core
competency, and its sustainable competitive advantage.
Resources, Capabilities and Core Competencies
• Resources are an organization’s assets
and are thus the basic building blocks of
the organization.
• They include:
– tangible assets:
• such as its plant, equipment, finances,
and location, human assets, in terms of
the number of employees and their
skills etc.
– intangible assets:
• such as its technology (patents and
copyrights), culture, reputation and
workers motivation .
Resources, Capabilities and Core Competencies

• Resources
• Physical
• Human
• Financial
• Other
• Quality and Quantity
• Unique resources
• A good initial analysis
Resources, Capabilities and Core Competencies
• Capabilities refer to a corporation’s ability
to exploit its resources.
• They consist of business processes and
procedures that manage the interaction
among resources to turn inputs into
outputs.
• A capability is functionally based and is
resident in a particular function. Thus,
there are:
– marketing capabilities,
– manufacturing capabilities, and
– human resource management capabilities.
Resources, Capabilities and Core Competencies
• Cont’d…
– For example, a company’s marketing capability
can be based on the interaction among its
marketing specialists, distribution channels, and
sales people.
– When these capabilities are constantly being
changed and reconfigured to make them more
adaptive to an uncertain environment, they are
called dynamic capabilities.
– The foundation of many capabilities lies in:
• The unique skills and knowledge of a firm’s
employees
• The functional expertise of those employee
Resources, Capabilities and Core Competencies
• A competency
• is a cross-functional integration and
coordination of capabilities.
• For example, a competency in new
product development in one division of a
corporation may be the consequence of
integrating management of information
systems (MIS) capabilities, marketing
capabilities, R&D capabilities, and
production capabilities within the division.
Resources, Capabilities and Core Competencies
• Core Competencies
– Resources and capabilities that serve as a
source of a firm’s competitive advantage:
– Distinguish a company competitively
and reflect its personality
• It is a collection of competencies that
crosses divisional boundaries,
• It is widespread within the corporation, and
• It is something that the corporation can do
exceedingly well.
Resources, Capabilities and Core Competencies

• Core Competencies
– It is the point where its greatest expertise
and capabilities lie
– Emerge over time through an
organizational process of accumulating
and learning how to deploy different
resources and capabilities.
– When core competencies are superior to
those of the competitors, they are called
distinctive competencies.
Conclusion
• It is important to evaluate the importance of a
company’s resources, capabilities, and competencies to
ascertain whether they are internal strategic factors—
that is, particular strengths and weaknesses that will
help determine the future of the company.
• This can be done by comparing measures of these
factors with measures of:
– (1) the company’s past performance,
– (2) the company’s key competitors, and
– (3) the industry as a whole.
Conclusion…..
• To the extent that a resource, capability, or competency
is significantly different from the firm’s own past, its key
competitors, or the industry average, that resource is
likely to be a strategic factor and should be considered
in strategic decisions.
• Even though a distinctive competency is certainly
considered to be a corporation’s key strength, a key
strength may not always be a distinctive competency.
• As competitors attempt to imitate another company’s
competency (especially during hyper competition), what
was once a distinctive competency becomes a minimum
requirement to compete in the industry.
 Competitive Advantage

• Definition: the ability to create more economic value than

competitors
– There must be something different about a firm’s offering vis-à-vis
competitors’ offerings

• Competitive advantage is the result of doing something

different and/or better than competitors
• All other elements of the strategic management process are
aimed at achieving competitive advantage
• If all firms’ strategies were the same, no firm would have a
competitive advantage
 Competitive Advantage
• Temporary & Sustainable
– competitive advantage typically results in high profits
– profits attract competition
– competition limits the duration of competitive advantage
in most cases.
• Therefore,
– most competitive advantages are temporary
– competitors imitate the advantage or offer something
better
• Some competitive advantages are sustainable if:
– competitors are unable to imitate the source of advantage
– no one conceives of a better offering.
How can Sustainable Competitive Advantage be Build?

• a firm is able to use its resources,

capabilities, and competencies to develop
a competitive advantage may not be able
to sustain it.
• Four Criteria of Sustainable Competitive
Advantage
– Valuable
– Rare
– Costly to imitate
– Non-substitutable
Cont’d……
• Valuable competencies
– Help a firm neutralize threats or exploit
opportunities
– The competencies need to be relevant
• Rare capabilities
– Are not possessed by many others
especially natural endowments
• Non-substitutable Capabilities
– No strategic equivalent
Building 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 like product formula, ingredients
– Social complexity
• Interpersonal relationships, trust, and
friendship among managers, suppliers,
and customers
 Determining the Sustainability of an Advantage

• Two characteristics determine the sustainability of a

firm’s distinctive competency(ies): durability and
imitability.
• Durability is the rate at which a firm’s underlying
resources, capabilities, or core competencies depreciate
or become obsolete.
• New technology can make a company’s core
competency obsolete or irrelevant.
Cont’d…..
• Imitability
– It is the rate at which a firm’s underlying resources,
capabilities, or core competencies can be
duplicated by others.
– A core competency can be easily imitated to the
extent that it is transparent, transferable, and
replicable.
 When is easy to imitate core competency
• It is relatively easy to learn and imitate another
company’s core competency or capability :
• if it comes from explicit knowledge
– knowledge that can be easily articulated and
communicated.
– This is the type of knowledge that competitive intelligence
activities can quickly identify and communicate.
• It is also relatively difficult to learn and imitate if it
comes from Tacit knowledge
– knowledge that is not easily communicated because it is
deeply rooted in employee experience or in a
corporation’s culture.
 Competitive Disadvantage
• people may have an aversion to the firm’s offering
• the firm may have a cost disadvantage
• a firm may have outdated technology /equipment
• a firm may have a negative reputation
 4.2 Value-Chain Analysis
• Manufacturing companies create value by acquiring raw
materials and using them to produce something useful.
• Retailers bring together a range of products and present
them in a way that's convenient to customers,
sometimes supported by services such as fitting rooms
or personal shopper advice.
• A value chain is a set of activities that an organization
carries out to create value for its customers.
• A value chain is the full range of activities – including
design, production, marketing and distribution –
businesses conduct to bring a product or service from
conception to delivery.
Cont’d…..
• A value chain is a linked set of value-creating activities.
• It begins with:
– Basic raw materials coming from suppliers,
– moving on to a series of value-added activities involved in
producing and marketing a product or service, and
– ending with distributors getting the final goods into the
hands of the ultimate consumer.
• The focus of value-chain analysis is to examine the
corporation in the context of the overall chain of
value-creating activities, of which the firm may be only
a small part.
Cont’d…..
• Each of a company’s product lines has its own distinctive
value chain.
• Because most corporations make several different
products or services, an internal analysis of the firm
involves analyzing a series of different value chains.
• The systematic examination of individual value activities
can lead to a better understanding of a corporation’s
strengths and weaknesses.
• According to Porter, “Differences among competitor
value chains are a key source of competitive advantage.”
 INDUSTRY VALUE-CHAIN ANALYSIS
• The value chains of most industries can be split
into two segments, upstream and downstream
segments.
• In the petroleum industry, for example,
– upstream refers to oil exploration, drilling, and moving
of the crude oil to the refinery, and
– downstream refers to refining the oil plus transporting
and marketing gasoline and refined oil to distributors
and gas station retailers.
• Even though most large oil companies are completely
integrated, they often vary in the amount of expertise
they have at each part of the value chain.
Cont’d…..
– Amoco, for example, had strong expertise downstream
in marketing and retailing.
– British Petroleum, in contrast, was more dominant in
upstream activities like exploration.
• That’s one reason the two companies merged to form
BP Amoco.
• In analyzing the complete value chain of a product, note
that even if a firm operates up and down the entire
industry chain, it usually has an area of expertise where
its primary activities lie.
• A company’s center of gravity is the point where its
greatest expertise and capabilities lie—its core
competencies.
Cont’d…..
• According to Galbraith, a company’s center of gravity is
usually the point at which the company started.
• After a firm successfully establishes itself at this point
by obtaining a competitive advantage, one of its first
strategic moves is to move forward or backward along
the value chain in order to:
– reduce costs,
– guarantee access to key raw materials, or to
– guarantee distribution.
• This process, called vertical integration.
Example of value chain in Textile
 CORPORATE VALUE-CHAIN ANALYSIS

• Each corporation has its own internal value chain of

activities.
• A firm’s value chain is segmented into primary and
support activities
• Porter proposes that a manufacturing firm has primary
activities contribute to the physical creation of the
product or service, its sale and transfer to the buyer, and
its service after the sale.
Cont’d….
• Usually it involves:
– inbound logistics (raw materials handling and
warehousing),
– operations process in which a product is
manufactured, and
– outbound logistics (warehousing and distribution),
– marketing and sales, and
– finally to service (installation, repair, and sale of parts).
Cont’d…..
• Activities of the value chain that facilitate the primary
activities are support activities.
• Several support activities include:
– procurement (purchasing),
– technology development (R&D),
– human resource management, and
– firm infrastructure (accounting, finance, strategic planning).
• They ensure that the primary value chain activities
operate effectively and efficiently.
The value chain activities
Primary Activity: Inbound Logistics
• Associated with receiving, storing and distributing inputs
to the product
– Location of distribution facilities
– Warehouse layout and designs
• Primary Activity: Operations
– Associated with transforming inputs into the final
product form
– Here, your operational systems create value.
– Incorporation of appropriate process technology
– Efficient plant layout and workflow design

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Primary Activity: Outbound Logistics
• Associated with collecting, storing, and distributing the
product or service to buyers
– Effective shipping processes to provide quick delivery
and minimize damages
– Shipping of goods in large lot sizes to minimize
transportation costs.
• Primary Activity: Marketing and Sales
• Associated with purchases of products and services by
end users and the inducements used to get them to make
purchases
– Innovative approaches to promotion and advertising
– Proper identification of customer segments and needs
Primary Activity: Service
• Associated with providing service to enhance or
maintain the value of the product
– Quick response to customer needs and emergencies
 Support Activity: Procurement
• Function of purchasing inputs used in the firm’s
value chain
– Procurement of raw material inputs
– Development of collaborative “win-win”
relationships with suppliers.
– Analysis and selection of alternate sources of
inputs to minimize dependence on one supplier.
Support Activity: Human Resource Management
• Activities involved in the recruiting, hiring, training,
development, and compensation of all types of
personnel
– Effective recruiting, development, and retention mechanisms
for employees
– Quality relations with trade unions
– Reward and incentive programs to motivate all employees
Support Activity: Technology Development
• Related to a wide range of activities and those
embodied in processes and equipment and the product
itself
– Effective R&D activities for process and product
initiatives
– Positive collaborative relationships between R&D and
other departments
– Excellent professional qualifications of personnel
Support Activity: General Administration

• Typically supports the entire value chain and not individual

activities
– Effective planning systems
– Excellent relationships with diverse stakeholder groups
– Effective information technology to integrate value-
creating activities
 Three steps for Corporate value chain analysis
• 1. Examine each product line’s value chain in terms of
the various activities involved in producing that
product or service:
• Which activities can be considered strengths (core
competencies) or weaknesses (core deficiencies)?
• Do any of the strengths provide competitive advantage
and can they thus be labeled distinctive competencies?
Cont’d….
• 2. Examine the “linkages” within each product line’s
value chain:
• Linkages are the connections between the way one
value activity (for example, marketing) is performed and
the cost of performance of another activity (for
example, quality control).
• In seeking ways for a corporation to gain competitive
advantage in the marketplace, the same function can be
performed in different ways with different results.
Cont’d…..
• 3. Examine the potential synergies among the
value chains of different product lines or
business units:
– Each value element, such as advertising or
manufacturing, has an inherent economy of scale in
which activities are conducted at their lowest
possible cost per unit of output.
– If a particular product is not being produced at a high
enough level to reach economies of scale in
distribution, another product could be used to share
the same distribution channel.
Cont’d….
– This is an example of economies of scope, which
result when the value chains of two separate
products or services share activities, such as the same
marketing channels or manufacturing facilities.
– The cost of joint production of multiple products can
be lower than the cost of separate production.
 Outsourcing value chain activities
• Outsourcing is the purchase of some or all of a value-creating
activity from an external supplier
• Outsourcing is a strategy by which an organization contracts out
major functions to specialized and efficient service providers, who
become valued business partners. (Griffiths)
• Firms outsource to varying degrees.
• BMW USA, for example, outsources virtually everything and
the plant here is primarily an assembly line plant.
• In contrast Apple computers manufactures virtually every
component in house, right down to the proprietary
software components that make up the operating system.
 Strategic 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
• Share Risks
• reduces investment requirements and makes firm more
flexible, dynamic and better able to adapt to changing
opportunities
• Free Resources for Other Purposes
• permits firm to redirect efforts from non-core activities toward
those that serve customers more effectively
 Cont’d…..
• The following table presents the disadvantages and
advantages of outsourcing in comparison with
insourcing.
Scanning Functional Resources and Capabilities
• A corporation’s value chain should be examined using
its traditional functional areas for potential strengths
and weaknesses.
• In addition to the usual business functions of
marketing, finance, R&D, operations, human resources,
and information systems/technology, we also discuss
structure as key part of a business corporation’s value
chain.
• If used properly, these resources and capabilities serve
as strengths to carry out value-added activities and
support strategic decisions.
 BASIC ORGANIZATIONAL STRUCTURES
• Although there is an almost infinite variety of structural
forms, certain basic types predominate in modern
complex organizations.
• Each structure tends to support some corporate
strategies over others
 Types of structure
Type of Description
structure
Simple • No functional or product categories
structure • Appropriate for a small, entrepreneur-
dominated company

Functional • Functional or product categories

structure • Appropriate for a medium-sized firm with
several product lines in one industry

Divisional • Appropriate for a large corporation with

structure many product lines in several related
industries.
• Employees tend to be functional specialists
 Types of structure
Type of structure • Description
• modification of the divisional structure.
Strategic business • SBU’s are divisions or groups of divisions
units (SBUs) composed of independent product market
segments
• Each segment given primary responsibility
and authority for the management of their
own functional areas

Conglomerate • typically an assemblage of legally independent

structure firms (subsidiaries) controlled through the
subsidiaries’ boards of directors.
• appropriate for a large corporation with many
product lines in several unrelated industries.
Basic organizational structure
 Cont’d…
• If the current basic structure of a corporation does not easily
support a strategy under consideration, top management must
decide whether the proposed strategy is feasible or whether the
structure should be changed to a more advanced structure such
as a matrix or network
 Corporate Culture: The Company Way
• There are three ways to do any job—
– the right way,
– the wrong way, and
– the company way.

• Around here, we always do things the company way.” In most

organizations, the “company way” is derived from the
corporation’s culture.
• Corporate culture is the collection of beliefs, expectations, and
values learned and shared by a corporation’s members and
transmitted from one generation of employees to another.

• The corporate culture generally reflects the values of the

founder(s) and the mission of the firm.
Cont’d…..
• Corporate culture has two distinct attributes,
– intensity and integration.
• Cultural intensity:
– the degree to which members of a unit accept the norms,
values, or other culture content associated with the unit.
– Employees in an intensive culture …consistent behavior.
• Cultural integration
– the extent to which units throughout an organization share a
common culture.
– This is the culture’s breadth.
 Strategic Marketing Issues

• A company’s primary link to the customer and the

competition.
• The manager, therefore, must be especially concerned
with the market position and marketing mix of the firm
as well as with the overall reputation of the company
and its brands.
Marketing Functions
• Marketing research
• Opportunity analysis
• Customer analysis
• Product & service planning
• Pricing
• Distribution
• Selling products/services
 Strategic Financial Issues
• Financing decision
• A financial manager must ascertain the best sources of
funds, uses of funds, and control of funds.
• All strategic issues have financial implications.

• To the extent that decisions are strategic, investment

capital is to be concerned than working capital.
• To the extent that a corporation is involved in
international activities, currency fluctuations must be
dealt with to ensure that profits aren’t wiped out by the
rise or fall of the foreign currency.
Cont’d….

• A firm’s capital structure (amounts of debt and equity)

can influence its strategic choices.
• Capital budgeting (Investment decision) is the
analyzing and ranking of possible investments in fixed
assets such as land, buildings, and equipment in terms
of the additional outlays and additional receipts that will
result from each investment.

• Dividend decision
 Strategic Operations Issues
• Production/Operations Functions
• The primary task of the operations manager is to develop and

operate a system that will produce the required number of

products or services, with a certain quality, at a given cost,

within an allotted time.

• Location and layout
• Process
• Capacity
• Inventory
• Workforce
• Quality
 Research & Development
• Research & Development Functions
• Development of new products before competitors
• Improving product quality
• Improving manufacturing processes to reduce costs
• The manager’s job, therefore, involves:
– (1) choosing among alternative new technologies to use within
the corporation,
– (2) developing methods of embodying the new technology in
new products and processes, and
– (3) deploying resources so that the new technology can be
successfully implemented.
• The amount spent on R&D often varies by industry.
 Strategic Human Resource (HRM) Issues

• The primary task of the HR manager is to improve the

match between individuals and jobs.
• The best strategies are meaningless if employees do
not have the skills to carry them out or if jobs cannot
be designed to accommodate the available workers.
 Strategic Information Systems/Technology Issues

• The primary task:

– to design and manage the flow of information in an
organization in ways that improve productivity and
decision making.
• Four main contributions to corporate performance:
• First, it is used to automate existing back-office
processes, such as:
– Payroll and human resource records,
– Accounting system, and
– establish huge databases.
 Cont’d…
• Second, it is used to automate individual tasks,
• Third, it is used to enhance key business functions, such
as:
– marketing and operations.
– This contribution focuses on productivity improvements.
• Fourth, it is used to develop competitive advantage.
 The SWOT diagram may
summarise the results of analyses

Internal
Internal
Analyses
Analyses
Strengths Weaknesses

Threats Opportunities

External
External
Analyses
Analyses
CHAPTER END