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Leadership & Management |
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Internal Analysis
Managers perform internal analysis to identify strength to build on and weaknesses to overcome as they formulate strategies to gain competitive advantage.
Internal analysis involves auditing the following; Resources, capabilities and competencies Competitive advantage Value chain analysis Gap analysis Portfolio analysis
Resources, capabilities and competencies
Resources refer to the financial, physical, human, technological and organizational resources of the company. A resource is an asset, competency, processes, skill or knowledge controlled by a corporation. A resource is strength if it gives a company a competitive advantage but it can also be a weakness if it is inferior to those of the competitors
The hierarchy of resourcesHigh
Breakthrough resources
Base resources
Peripheral resourcesLow
Core resourcesCompetitive Advantage
The hierarchy of resources contd.
Breakthrough resources-bring major strategic shifts in the industry
Core resources- unique to the organization and the basis of its sustainable competitive advantage
Base resources- common to many companies but useful to keep inside the company
Peripheral resources-often bought in but can occasionally give competitive advantage
The 3 basic categories of resources
Tangible assets-the physical resources a company uses to provide value to its customers.
Intangible Assets-brand names, company reputation, organizational morale, technical knowledge, patents, and trademarks technological or marketing know how and other accumulated experiences within an organization
Organizational capabilities-a company’s skills at co-coordinating its resources and putting them into productive use. They are skills, the ability and ways of combining assets, people and processes that a company uses to transform inputs into outputs.
Classifying Resources
Financial resources-Cash reserves. Short term financial assets, Borrowing capacity, Cash flow patterns
Physical Resources-Plant equipment, location, technology
Human Resources-The experience and skills of different categories of employee, adaptability of employees, loyalty of employees, Skills and experience of top management.
Technology -Proprietary technology in the form of patents, copyrights, and trade marks,technological resources in the form of R&D facilities.
Reputation-Product brands, Trade marks, Company reputation
Relationship-With customers, suppliers, distributors and government authorities.
What makes a resource valuable?
Competitive superiority Resource Scarcity Inimitability
Physically unique resources Path dependent resources Causal ambiguity Economic deterrence
Appropriability Durability Substitutability
Functional capabilities
Corporate Strategic control Multinational management Acquisitions management
Marketing International brand management Building customer trust Market research and segment-targeted
Human Resource management Building employee loyalty and trust Management development
Design New product design capability
R& D New product development capability
Functional capabilities contd.
Operations Efficiency in volume manufacturing Manufacturing flexibility Quality manufacturing.
Management information systems Timely and comprehensive
communication of information. Sales and distribution.
Efficiency and speed of distribution Order processing efficiency
Core Competences
Refers to the critical bundle of skills that an organization can draw onto distinguish itself from competitors.
It is something that a corporation can do exceedingly well.
If these skills are superior to the skills of competitors they are referred to as distinctive competences
Assets combined with capabilities produce competencies that can yield competitive advantages
Qualities of effective core competencies
Emphasize skills or knowledge sets, not products or functions
Flexible, long-term platforms-capable of adoption or evolution
Limited in number-activities in the value chain most critical to future success
Unique sources of leverage in the value chain-knowledge gaps that the company is uniquely qualified to fill
Areas where the company can dominate Elements important to customers in the long run Embedded in the organizations systems
Competitive advantage
Why some companies do better than others in the same industry?
What is the basis of competitive advantage?
Competitive advantage refers to that internal factor that enables a business firm to have market superiority or leverage over its competitors on a sustainable basis
It entails having an edge over competitors and achieving above average profitability that will maintain that position
Building blocks of competitive advantage
Superior efficiency
Superiorcustomer
responsiveness
Superiorinnovation
Low –cost differentiation
Superior quality
Competitive Advantage
Quality
Quality products are goods and services that are reliable in the sense that they do the job they were designed for and do it well.
Quality looks at performance features; reliability, conformance, durability, serviceability, aesthetics and the products’ overall reputation.
The impact of high product quality on competitive advantage is two fold:
High quality products create a brand name reputation for the company’s products which allows the company to charge high prices.
High quality standards result into improved productivity. Higher product quality means that less employee time is wasted making defective products or providing substandard services and less time is spent fixing mistakes
The impact of quality on profits
Increasequality
Increased productivity
Lower costs
Higher profits
Increased reliability
Higher prices
Efficiency
Efficiency is measured by the cost of inputs required to produce a given out put.
The efficient the company, the lower is the cost of inputs required to produce a given output. The most important component of efficiency for most companies is employee productivity, which is usually measured by output per employee.
Innovation
Innovation is defined as anything new about the way a company operates or the products it produces.
Innovation may take different forms; advances in the different kinds of products, production processes, management systems, organizational structures and strategies developed by the company.
A successful innovation allows a company to differentiate itself from its rivals and charge a premium price for its products or to reduce its unit costs far below those of competitors.
Customer responsiveness
This refers to the ability of the company to attract satisfy and sustain customers for a long period of time. To be able to achieve this company must ensure that customers get exactly what they want, when they want it and where they want it. This involves making sure that:
Customers needs are clearly identified and sufficiently satisfied
Goods and services are customized to the unique demands of individual customers
Customer response time is minimized as much as possible
There is superior product design, superior service and superior after sale service and support.
The impact of efficiency, quality, customer responsiveness and innovation on unit costs and prices
Efficiency
Lower unit costsInnovation Quality
Higher unit prices
Customer responsivenes
Value Chain Analysis The term value chain describes a way of looking at a
business as a chain of activities that transform inputs into outputs that customers value.
The value a company creates is measured by the amount that buyers are willing to pay for the product or service.
A company is profitable if the value it creates exceeds the cost of performing value creation functions such as procurement, manufacturing and marketing.
Customer value is derived from 3 basic sources, i.e. activities that differentiate the product, activities that lower its cost and activities that meet customers’ need quickly.
To be able to gain a competitive advantage a company must either perform value creation functions at lower cost than its rivals or perform them in away that leads to differentiation to be able to charge a premium price.
Porter’s generic value chain model.
SupportActivities
Infrastructure (structure & leadership)
Human resources
Research & Development
Materials management
Inbound logistics
OperationsOutbound Logistics
Marketing & sales
AfterSaleService
Primary activities
Primary activities
Primary activities are concerned with the physical creation of the product, its marketing and delivery to buyers and its support and after sale services. Primary activities are classified into five generic forms
Inbound Logistics – activities associated with receiving, storing and disseminating inputs to the product
Operations – activities associated with transforming inputs into final product form
Outbound Logistics – activities associated with collecting, storing and physically distributing the product to the buyer
Marketing and sales – activities associated with providing a means by which buyers can purchase the product and inducing them to do so
Service – activities associated with providing after sale service to enhance or maintain the value of the product
Support activities
These are the functional activities that supplement and allow the primary activities to work smoothly. Support activities include;
Materials management function – controls the transmission of physical materials through the value chain
Research and Development function – develops new product and process technologies which results into lower production costs and creation of more attractive products that demand a premium price
Human resource function – ensures that the company has the right mix of skilled people to perform its value creation activities effectively
Company infrastructure – this includes the company’s organizational structure, control systems and culture
Gap analysis
This is a method used to determine any difference between a firm’s objectives and what it will achieve in future if it makes no change in strategy. It helps managers to ascertain the strategic gap in performance but its effectiveness greatly depends on the ability to make reasonable forecasts. Parameters used in analysis include sales volume, profit revenue levels etc
Gap Analysis contd.
New strategies
Stable strategies
Performance gap
Expected outcome
Desired out come
PORTFOLIO ANALYSIS This refers to the techniques used to analyze big
companies with multiple product lines or business units and how these various products and business units can be managed to boost the overall corporate performance.
Portfolio analysis helps top managers to make decisions like what strategic business units to expand maintain or retrench with a specific focus on the following: How much time and money should be spent on best
products and businesses to ensure that they continue to be successful.
It looks at product lines/ business units as a series of investments from which the top management expects a profitable return.
It looks at long term performance objectives; market share, profitability, sales growth and competitive strength.
PORTFOLIO ANALYSIS TECHNIQUES
The Boston Consulting Group (BCG) -Growth-Share matrix
The General Electric -Strength Attractiveness matrix
The Life Cycle matrix
THE BOSTON CONSULTING GROUP GROWTH-SHARE MATRIX
The main objective of this technique is to help senior managers identify the cash flow requirements of different businesses in their portfolio. The BCG approach involves 3 steps;
Dividing the Company into strategic business units and assessing the long-term prospects of each.
Comparing SBUs against each other by means of a matrix that indicates the relative prospects of each basing on the relative market share and the growth rate of the SBUs industry.
Developing strategic objectives with respect to each SBU
Boston Consulting Group Matrix
●
●
CELL 2STARS
CELL 1
QUESTION MARKS
CELL 3CASH COWS
CELL 4DOGS
HIGH LOW RELATIVE MARKET SHARE
I N HIGH
DUSRYGROWTHR
A LOWT
E
