Copyright © 2004 South-Western. All rights reserved.3–1 Chapter 3: The Internal Environment...

Copyright © 2004 South-Western. All rights reserved. 3–1

Chapter 3: The Internal Environment

• Internal analysis – why? how?• Resources – tangible and intangible• Capabilities• Core competencies (distinctive competence)• Four criteria for sustainable competitive advantage• Value chain analysis• Outsourcing• Core rigidities• Financial performance measures• SWOT analysis


Figure 1.1Figure 1.1

Copyright © 2004 South-Western. All rights reserved.

The Strategic

Management Process


Outcomes from External and Internal Environmental Analyses


Examine opportunities and threats

Examine resources, capabilities, and core competencies; identify strengths, weaknesses, and sustainable competitive advantages


Components of Internal Analysis



Conditions contributing to the challenge of identifying strengths and

weaknesses -

Uncertainty

Complexity

Organizational conflicts


Facilitating Internal Analysis via . . .

• Ongoing observation (media reports, problems, successes, MBWA)

• Brainstorming• Retreats• Task forces• In-house facilitator or external consultants• Ongoing planning activities• Periodic functional audits• Value chain analysis• “Devil’s advocates”, “upstream swimmers”


Resources, Capabilities and Core Competencies

• ResourcesAre the source of a

firm’s capabilitiesAre broad in scopeCover a spectrum of

individual, social and organizational phenomena

Alone, do not yield a competitive advantage



• ResourcesTangible resources

Financial resources Physical resources Technological resources Organizational resources

Intangible resources Human resources Innovation resources Reputation resources


Tangible Resources

Financial Resources •The firm’s borrowing capacity•The firm’s ability to generate internal funds

Organizational Resources •The firm’s formal reporting structure and its formal planning, controlling,and coordinating systems

Physical Resources •Sophistication and location of a firm’s plant and equipment

•Access to raw materials

Technological Resources •Stock of technology, such as patents, trade-marks, copyrights, and trade secrets

SOURCES: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–102. Table 3.1Table 3.1


Intangible ResourcesHuman Resources • Knowledge

• Trust• Managerial capabilities• Organizational routines

Innovation Resources • Ideas

• Scientific capabilities • Capacity to innovate

Reputational Resources • Reputation with customers

• Brand name • Perceptions of product quality,

durability, and reliability • Reputation with suppliers

SOURCES: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136–139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.

Table 3.2Table 3.2



• Capabilities Are the firm’s capacity to deploy

resources that have been purposely integrated to achieve a desired end state

Emerge over time through complex interactions among tangible and intangible resources

Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital

Often based in specific functional areas


Examples of capabilities

• Efficient distribution – Wal-Mart• Information systems – Wal-Mart• Effective customer service – Nordstrom• LT sales relationship, service – Caterpillar• Low-cost manufacturing – Nucor Steel• Production/distribution of high quality

research-based children’s educational programming; fund raising/partnerships; licensing; tapping employee inspiration - Sesame Street Workshop



• Core CompetenciesResources and capabilities

that serve as a source of a firm’s competitive advantage: Distinguish a company from its

competitors and reflect its personality

Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities


Building Sustainable Competitive Advantage

• Four Criteria of Sustainable Competitive AdvantageValuableRareCostly to imitateNonsubstituable



• Valuable capabilitiesHelp a firm neutralize

threats or exploit opportunities

Are valued by the marketplace

• Rare capabilitiesAre not possessed by

many others


Building Sustainable Competitive Advantage • Difficult-to-Imitate

CapabilitiesHistorical

A unique and a valuable organizational culture or brand name

Ambiguous cause-effect The causes and uses of a

competence are unclear

Social complexity Interpersonal relationships,

trust, and friendship among managers, suppliers, and customers



• Nonsubstitutable CapabilitiesNo strategic equivalent

(Organizationally accessible)


Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Table 3.5Table 3.5


• Identify and protect core competencies

• Use your core competencies; reply on in competitive strategies

• Continually develop and renew core competencies

• Leverage core competencies into areas of opportunity

Core/Distinctive Competencies – So What? Who Cares?


Value Chain Analysis

• Allows the firm to understand the parts of its operations that create value and those that do not

• A template that firms use to:

Understand their cost position

Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy


Value Chain Analysis (cont’d)

• Primary activities involved with:

A product’s physical creation

A product’s sale and distribution to buyers

The product’s service after the sale

• Support activities

Provide the support necessary for the primary activities to take place


Value Chain Analysis (cont’d)

• Value chain

Shows how a product moves from raw-material stage to the final customer

• To be a source of competitive advantage, a resource or capability must allow the firm:

To perform an activity in a manner that is superior to the way competitors perform it, or

To perform a value-creating activity that competitors cannot complete


The Basic Value Chain

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

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The Value-Creating Potential of Primary Activities

• Inbound logistics Activities used to receive, store, and disseminate inputs to

a product (materials handling, warehousing, inventory control, etc.)

• Operations Activities necessary to convert the inputs provided by

inbound logistics into final product form (machining, packaging, assembly, etc.)

• Outbound logistics Activities involved with collecting, storing, and physically

distributing the product to customers (finished goods warehousing, order processing, etc.)


The Value-Creating Potential of Primary Activities (cont’d)

• Marketing and sales Activities completed to provide means through which

customers can purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.)

• Service Activities designed to enhance or maintain a product’s

value (repair, training, adjustment, etc.)

Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent or inferior


The Value-Creating Potential of Primary Activities: Support

• Procurement Activities completed to purchase the inputs needed to

produce a firm’s products (raw materials and supplies, machines, laboratory equipment, etc.)

• Technological development Activities completed to improve a firm’s product and the

processes used to manufacture it (process equipment, basic research, product design, etc)

• Human resource management Activities involved with recruiting, hiring, training,

developing, and compensating all personnel


The Value-Creating Potential of Primary Activities: Support (cont’d)

• Firm infrastructure Activities that support the work of the entire value chain

(general management, planning, finance, accounting, legal, government relations, etc.) Effectively and consistently identify external opportunities and

threats Identify resources and capabilities Support core competencies

Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent or inferior


Use of Value Chain Analysis

Advantages? Disadvantages?


Useful financial analysis

• Examines trends in financial measures over several (more than two) years

• Analyzes entries in financial statements; consider growth rates, % composition

• Calculates a rich set of financial ratios (pp. xiv-xv)

• Interprets the financial calculations

• Provides defensible conclusions about the organization’s overall financial situation


Outsourcing

• The purchase of a value-creating activity from an external supplierFew organizations possess the resources and

capabilities required to achieve competitive superiority in all primary and support activities

• By forming and emphasizing fewer capabilitiesA firm can concentrate on those areas in which it

can create valueSpecialty suppliers can perform outsourced

capabilities more efficiently


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Outsourcing Decisions

A firm may A firm may outsource all or only outsource all or only part of one or more part of one or more primary and/or primary and/or support activities.support activities.

Outsourced activity

Inbound Logistics

Service

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Strategic Rationale for Outsourcing

• Improve business focusLets a company focus on broader business

issues by having outside experts handle various operational details

• Provide access to world-class capabilitiesThe specialized resources of outsourcing

providers makes world-class capabilities available to firms in a wide range of applications


Strategic Rationale for Outsourcing (cont’d)• Accelerate business re-engineering benefits

Achieves re-engineering benefits more quickly by having outsiders—who have already achieved world-class standards—take over process

• Sharing risksReduces investment requirements and makes

firm more flexible, dynamic and better able to adapt to changing opportunities

• Frees resources for other purposesRedirects efforts from non-core activities toward

those that serve customers more effectively


Outsourcing Issues

• Greatest valueOutsource only to firms possessing a core

competence in terms of performing the primary or supporting the outsourced activity

• Evaluating resources and capabilitiesDo not outsource activities in which the firm

itself can create and capture value

• Environmental threats and ongoing tasksDo not outsource primary and support activities

that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks


Outsourcing Issues (cont’d)

• Nonstrategic team of resourcesDo not outsource capabilities that are critical to

the firm’s success, even though the capabilities are not actual sources of competitive advantage

• Firm’s knowledge baseDo not outsource activities that stimulate the

development of new capabilities and competencies


Cautions and Reminders

• BEWARE OF COMPLACENCY! Never take for granted that core competencies will continue to provide a source of competitive advantage.

• Core competencies have the potential to become core rigidities.

• Core rigidities are former core competencies that now generate inertia and stifle innovation.

• Remaining vigilant/poised for change through continuous and effective analyses of internal and external environments increases the likelihood of long-term competitive success


SWOT Analysis

External analysis of general environment, industry environment,

5 forces of competition,strategic groups,

competitive intelligence, key success factors

to identify

OPPORTUNITIES and THREATS

Internal analysis ofResources, capabilities, core competencies, and competitive advantages

(using value chain analysis, functional

audits, financial analysis, or other tools)

to identify

STRENGTHS andWEAKNESSES


Using the SWOT Analysis

Create strategies that• Are consistent with org’l mission• Rely on internal strengths• Pursue external opportunities• Achieve external strategic fit• Buffer external threats (both offensive and

defensive approaches are desirable)• Minimize the effects of internal weaknesses• Achieve internal strategic fit

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