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Lassessing Strengths and Weaknesses: Internal Analysis

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Chapter 4 Assessing Strengths and Weaknesses: Internal Analysis

Instructor: Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336)334-5305 Email: [email protected]


Lecture Objectives (1) Define internal analysis and discuss why it is important. (2) Describe the relationship between organizational organizational resources, organizational capabilities, core competencies, and distinctive organizational capabilities. (3) Explain what organizational strengths and weaknesses are. (4) Define the value chain and describe the primary and support activities on the value chain. (5)on Explain the strategic options for correcting cost competitiveness the value chain system. (6) Discuss the steps in conducting a competitive strength assessment (7) Explain how to use the internal audit process (8) Discuss the features of an internal environmental analysis process (9) Describe the steps in capabilities assessment assessment profile


What is Internal Analysis? • The process of identifying and evaluating an organization’s specific characteristics  characteristics 

Resources, capabilities, and core competencies  – Resources,  –   – Looks at organization’s  organization’s  Current

• vision • Mission(s) • Strategic & financial objectives • Strategies


Why Do an Internal Analysis? • Enables a firm to identify its strengths s trengths and weaknesses. • Enables a firm to make good strategic decisions. • Information from internal environment provides  basis for developing strategic strategic alternatives.


A Quick Review of Organizational Resources • Organizational resources are assets an organization has for carrying out work activities and processes  – Financial  –  Financial resources • Current debt, credit lines, equity, cash reserves, etc.

 – Physical  –  Physical resources

• Plant & equipment, inventories, supplies, fixtures, etc.

 – Human  –  Human resources • Management & employee skills, training, experiences, etc


A Quick Review of Organizational Resources  – Intangible  –  Intangible resources • Brand names, patents, trademarks, copyrights, etc.

 – Structural-cultural  –  Structural-cultural resources • Culture, history, work systems policies, formal reporting structures, etc

• Human, intangible, and structural-cultural resources can be a source of competitive advantage  – Play  –  Play important role in determining capabilities or competencies and core competencies


Organizational Capabilities • Organizationa Organizationall capabilities/competencies  – The  –  The complex and coordinated network of company routines and processes that determines how efficiently and effectively the organization transforms its resources into products (goods & services)  –  Involves complex pattern of coordination between  – Involves  people, & between between people and resources nterr nal activity   – It’s an i nte  that a company performs  that better  than other internal activities


Organizational Capabilities • Organization Organizational al routines & processes: • Regular, predictable, and sequential patterns of work activity by organizational members

• Sustainable Competitive Advantage (CA): • The prolonged maintenance of competitive advantage of leading to CA today may • Capabilities not continue that to doare so capable as conditions & rivals change

• Dynamic capabilities • An organization’s ability to build, integrate and reconfigure capabilities to address rapidly changing environments over time.


Core Competencies • Core competencies  –  A well-performed internal activity that is central , not  – A ategy, y, compe com peti ti ti ve ven n ess,  peripheral, to a company’s company’s str ateg and pr pr of i ta tab bi li ty     – Major  –  Major value-creating skills and capabilities that •  are shared across multiple product lines or multiple

 businesses • Results from the collaboration among different parts of an organization

 – Gives  –  Gives a company a potentially valuable competitive capability


Core Competencies • Types of Capabilities/Core Competencies Competencies  –  Skills in manufacturing a high quality product  –  System to fill customer orders accurately and swiftly  –  Fast development of new products  –  Better after-sale service capability  –  Superior know-how in selecting good retail locations  –  Innovativeness in developing popular product features  –  Merchandising and product display skills  –  Expertise in an important technology  –  Expertise in integrating multiple technologies to create whole families of new products


From Core Competencies to Distinctive Capabilities • Distinctive Capabilities  – Special  –  Special and unique capabilities that distinguish the organization from its competitors  – A  –  A co compe mpeti ti ti ve vell y val valu u ab abll e ac acti ti vi vity  ty   that a  that perr f or orms ms be bette tterr th than an i ts r i va vall s company pe  –  Allow a company to develop a sustainable competitive advantage and outperform its competition


From Core Competencies to Distinctive Capabilities • Characteristics of distinctive capabilities: (1)real Contribute customer value and offers benefits to to superior customers (2) Difficult for competitors to imitate (3) Allow the organization to use that capability in a variety of ways

• What’s the relationship between organizational capabilities, core competencies and distinctive capabilities?


Examples of Distinctive Capabilities • Sharp Corporation  – Expertise  –  Expertise in flat-panel display technology • Toyota  – Low-cost,  –  Low-cost, high-quality manufacturing capability and short design-to-market cycles • Intel Corporation  –  Ability to design and manufacture ever more  – Ability  powerful microprocessors for PCs • Motorola  –  phones  – Defect-free Defect-free manufacture (six-sigma quality) of cell  


Strengths and Weaknesses • Strengths  – Resources  –  Resources that an organization possesses   and  and capabilities that the organization has developed  – Both  –  Both can be exploited   and developed   and  into a  into sustainable competitive advantage

• Weaknesses  – Resources  –  Resources and capabilities that are lacking or deficient; and that  –  Prevents   an organization from developing a  an sustainable competitive advantage


How to Do an Internal Analysis Approaches to internal analysis (1) Value Chain Analysis (2) Competitive Strength Assessment (3) An Internal Audit (4) Internal Environmental Analysis Process (5) Capabilities Assessment Profile


(1) Value Chain Analysis • Value Chain Analysis  – Customers  –  Customers want (demand) some type of value from the goods and services they purchase or obtain  –  Customer value arises from (1) Uniqueness of product or service (2) Low-priced product/service (3) Quick response to specific or distinctive customer needs

 – Allow  –  Allow assessment of cos costt compe competi ti ti ve ven n ess   of  of organization with those of its rivals


The Value Chain • The value chain identifies the separ parate ate activi acti viti ti es and  business processes performed to design, design, produce, market, deliver, and support a product/service and how well they create customer value. • Consists of two types of activities  –  Pr Prii ma marr y acti tiv vi ti tie es   : create customer value • Inbound logistics, Operations; Outboard logistics; Sales & Marketing; & Customer Service

 –  Su pp ppor ortt acti activi viti ti es: Support primary activities  • Procurement; Technological development; HRM; General Administration (Firm infrastructure)


A Typical Value Chain P r im i m a r y A c t i v i t i es es a n d C o s t s

Inbound Logistics



Sales and




Profit Margin

Procurement; Product R&D, Technology Human Resources Management General Administration (Firm Infrastructure)

Support Activities and Costs


The Value Chain System Upstream Value Chain

Firm’s Own Value Chain

Internally Performed Activities, Costs, & Margins of Suppliers

Activities, Costs, & Margins

Downstream Value Chains

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains


Examples of Key Value Chain Activities

• Soft Drinks Industry

Processing of basic ingredients Syrup manufacture Bottling & can filling

Wholesale distribution Retailing • Computer Software Industry Programming Disk Loading Marketing Distribution


The Value Chain System • A company’s cost cost compe compett i ti ve ven n ess    depends on how well it manages its value chain relative to competitors • Three areas contribute to cost differences 1.  Suppliers’ activities 2. The company’s own internal   activities  activities 3. Forward   channel  activities  activities


The Value Chain System • Assessing a company’s cos costt competi competi ti ve ven n ess    involves comparing costs along the industry’s value chain  •  Suppliers’ value chains are relevant because  –  Costs, quality, and performance of inputs provided by suppliers influence a firm’s own costs and product performance  performance 

• Forward channel allies’ value chains are relevant  because   – Forward channel allies’ costs and margins are part of price paid  by ultimate end-user  –  Activities performed affect end-user satisfaction


Strategic Options for Correcting Costs Competitiveness • Supplier-related costs disadvantages:  –  Negotiate  Negotiate more favorable favorable prices with suppliers  – Work  –  Work with suppliers to achieve lower costs  – Integrate  –  Integrate backward  –  Use lower-priced substitute inputs  – Use Do a better job of managing linkages between  – Do  –  suppliers’ value chains and firm’s own chain  chain    – Make  –  Make up difference by initiating cost savings in other areas of value chain


Strategic Options for Correcting Costs Competitiveness • Forward channel allies’ costs disadvantages:  – Push  –  Push for more favorable terms with distributors and other forward channel allies  – Work  –  Work closely with forward channel allies and customers to identify win-win opportunities to reduce costs Change to a more economical distribution strategy  – Change  –   – Make  –  Make up difference by initiating cost savings earlier in value chain


Strategic Options for Correcting Costs Competitiveness • Firm’s own internal cost disadvantages:  –  processes Reengineer performance of high-cost activities or business  –  Eliminate some cost-producing activities altogether by revamping value chain system (VCS)  –  Relocate high-cost activities to lower-cost geographic areas  –  See if high-cost activities can be performed cheaper by by outside vendors/supp vendors/suppliers liers  –  Invest in cost-saving technology  –  Simplify product design  –  Achieving savings in backward or forward portions of VCS


From Value Chain Analysis to Competitive Advantage competi ti ti ve adva advan n tage • A company can create compe  by managing its value chain so as to  –  I n te tegr grate ate the knowledge and skills of employees in competitively valuable ways  –  Leverage   economies of learning or experience curve effects  –  Coordinate   related activities in ways that build  related valuable capabilities domin ati atin n g expe xperr ti tis se in a value chain activity  –  B ui l d domin

critical to customer satisfaction or market success  

From Value Chain Analysis to Competitive Advantage • The strategy-making lesson of value chain able e compe competi ti ti ve analysis is that su stai n abl advantage   can be created by:

(1). Managing   the value chain activities better  the than competitors; and (2). Developing   distinctive capabilities to  distinctive serve the needs of customers better


(2) Assessing Organization’s Competitive Strength ative ve to key key ri r i va vall s on each • How does the firm rank r el ati K SF  and relevant industry measure of competitive strength (capabilities or core competencies)? • Does the firm have a sustainable compe competi ti ti ve adva advan n tage or disadvantage deff en d its i ts pos posii ti on in • What is the ability of the firm to de light of  –  Industry driving forces  –  Competitive pressures  –  Anticipated moves of rivals


Assessing Organization’s Competitive Strength 1. List industry key success factors and other relevant measures of competitive strength 2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong) 3. Decide whether to use a weighted   or unweighted   or  rating  rating

system 4. Sum individual ratings to get overall measure of competitive strength for each rival 5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage


Assessing Organization’s Competitive Strength • A weighted   competitive strength analysis is  competitive conceptually stronger than an unweighted    competitive strength analysis because  – All  –  All the strength measures are not equally important.  – E.g.,  –  E.g., in an industry with strong product differentiation, the significant strength measures may be • Brand awareness • Reputation for quality • Amount of advertising • Distribution capability, etc.


Some KSF/Strength Measures • Quality/product performance • • • • • • •

Reputation/image Manufacturing capability Technological skills Dealer network/Distribution channels  New product innovation Financial resources Relative cost position

• Customer service capability


Assessing Organization’s Competitive Strength

• What does a high competitive strength rating relative to rivals mean?  –  Strong competitive position & possession of competitive advantages  –  Opportunity for company to improve its long-term market  position

• Good strategy entails  –  Looking for opportunities to leverage company strengths into competitive advantage  –  Using company strengths to attack the competitive weaknesses of rivals


Why Do a Competitive Strength Assessment? • Reveals strength of firm’s competitive position  position  • Shows how firm stacks up against rivals, measure by-measure -- pinpoints -- pinpoints the company’s company’s competitive strengths and competitive weaknesses • Indicates whether firm is at a competitive advantage / disadvantage against each rival • Identifies possible offensive attacks (pit company strengths against rivals’ weaknesses) • Identifies possible defensive actions (a need to correct competitive weaknesses)


(3) Using an Internal Audit • Internal Audit  – A thorough assessment of of an organization’s various internal functional areas  – Strategic  –  Strategic decision makers use the internal audit to assess thefrom organization’s resources and capabilities the perspectives of its different functions


Using an Internal Audit • Six primary functional areas  –  Production-operations  –  Marketing  –  Research & development  –  Financial and accounting  –  Management, including HRM  –  Information System

• Depending on products, markets, and industries, individual organizational structures may vary and, therefore, may emphasize different sets of functional areas


(4) Using an Internal Environmental Analysis Process • Assesses an organization’s internal activities  activities   –  Step 1  : Survey strengths and weaknesses  –  Step 2  : Categorize these strengths & weaknesses (S&W) in terms of resources & capabilities  –  Step 3:  Investigate the potential of strengths to lead to competitive advantage  –  Step 4  : Evaluate the ability of these competitively resources & capabilities to serve as the basis for an appropriate competitive strategy


(5) Capabilities Assessment Profile • Resembles the internal environmental analysis  –  Similarity: Focuses on deeper evaluation of S&W  – Similarity:  – Difference:  –  Difference: Focuses only on an firm’s capabilities  capabilities 

• Analysis of capabilities is complex  – Not as easily identified identified as organization’s function or even the value creating primary & support activities  – Complex  –  Complex nature of capabilities makes it hard for competitors to imitate


Capabilities Assessment Profile • Analysis Consists of two phases:  –  Phase I: Identify distinctive capabilities  – Phase  – Phase  –  Phase II: Develop and leverage distinctive capabilities

• Identifying Distinctive Organizational Capabilities 1: Prepare current product-market profile  –  Step • Emphasize organization-customer interactions • What is the organization selling? • Who are the organization selling to? • Is the organization providing superior customer value & desirable benefits?


Capabilities Assessment Profile  –  Step 2: Identify sources of competitive advantage & disadvantage in the main productmarket segment • Determine Determine why custome customers rs choose choose the organiz organization’ ation’ss  products vs. those of competitors • Involves information on cost, product, and service attributes  – When  –  When customers purchase  – What they’re actually purchasing purchasing    – What  –  What bundle of attributes satisfies their needs


Capabilities Assessment Profile  –  Step 3: Describe all organizational capabilities & competencies • Examine resources, skills, & abilities of the various divisions • Determine which resources, skills, & abilities lead to a competitive advantage

 –  Step 4: Sort the core capabilities/competencies capabilities/competencies according to strategic importance • Can capability provide wide access to a number of different markets? • Does the capability provide tangible customer benefits? • Is the capability difficult for competitors to imitate?


Capabilities Assessment Profile  –  Step 5: Identify and agree on the key capabilities or competencies •  Provide basis for resource allocation

• Classifying an Organization’s S&W  S&W   – Past  –  Past performance trends

• Measures such as financial ratios, operations op erations efficiency, etc,

 – Specific  –  Specific goal or targets

• Organi Organization zation’s ’s goals goals are statem statements ents of of desired desired outcomes outcomes  

 – Comparison  –  Comparison against competitors • How are competitors doing?

 – Personal  –  Personal opinions of decision makers & consultants

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